Devil was in details of Yahoo, Microsoft search tie-up

Carol Bartz and Steve Ballmer said they needed time to hash out the specifics of a deal that took more than a year to seal

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Microsoft and Yahoo took so long to reach an Internet search and advertising agreement because they considered factors beyond key financial considerations to ensure a deal would allow both companies to drive their separate online businesses forward, their CEOs said Wednesday.

Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz explained on a conference call Wednesday why the companies struck a deal now when a similar one was on the table a year ago.

Under terms of the 10-year deal, Microsoft's Bing search engine and adCenter platform will power Yahoo's search-based advertising business, while Yahoo's sales team handles both companies' premium search customers.

Last year's proposed deal involved a cash payment up front and less annuity revenue for Yahoo, whereas the deal announced Wednesday involves no up-front cash and more revenue for Yahoo over the long term.

That revenue will come in the form of Microsoft paying Yahoo traffic acquisition costs (TAC) at an initial rate of 88 percent of search revenue generated by owned and operated sites, the companies said. TACs are payments made to a company to acquire traffic on its website.

That revenue over time will benefit Yahoo and its shareholders better than a big up-front cash payment, which is why Wednesday's deal was more attractive to Yahoo than the one presented by Microsoft last year, Bartz said.

"Having cash payment up front doesn't help us from an operating standpoint," she said. "What was important was a significant TAC rate - revenue that's supported - so we could invest in the business."

However, it was not just the financial terms of the previously proposed deal that proved problematic last summer, when Yahoo co-founder Jerry Yang was still at the helm. Bartz became CEO in January after Yang stepped down last November amid pressure over his failure to reach a deal with Microsoft.

"Frankly, the big thing was to work through not just high-level financial but the details and working process" of how the companies would execute both from a corporate standpoint and in the marketplace, Microsoft's Ballmer said.

This was the topic of meetings between Ballmer and Bartz this year in the months leading up to the deal. They worked out back-end details to ensure the deal was in line with both companies' long-term goals and strategies for their Internet businesses, he said.

The companies also worked hard to ensure they could protect the privacy of their customers and users when sharing information between them, he said.

Another factor the companies weighed in the deal is the opportunity it gives them to reach a larger network of advertisers to compete more effectively with Google, Bartz said. Google has about 78 percent of the search advertising market in the U.S. and about 92 percent in Europe, Ballmer said on Wednesday.

"What's really important about this deal is scale," Bartz said. "It's great news for all of our customers and will really allow us to create more innovation in search and real consumer choice."

Indeed, scale is one big benefit the two companies will get from the deal, agreed industry analyst Greg Sterling from Sterling Market Intelligence, who echoed Bartz's sentiment. That scale, he added, "makes them more viable competitors to Google."

When asked how Yahoo will continue to innovate in search when it essentially will shut down its own search-engineering efforts in favor of using Microsoft's, Bartz said that Yahoo's display-ad business and engineering efforts can benefit from the combined search business. Both companies are retaining their display-advertising businesses, which are not a part of the deal.

"There is a lot of innovation that happens above search results -- how it's integrated with search that goes on the Yahoo side," Bartz said. "We're kind of learning we can use search data for display targeting. There is a lot that can happen."

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