Ballmer 1, Bartz 0 in Lopsided Microhoo Deal - InformationWeek

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7/29/2009
01:12 PM
Paul McDougall
Paul McDougall
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Ballmer 1, Bartz 0 in Lopsided Microhoo Deal

Yahoo investors are burning their stock certificates to protest the company's search pact with Microsoft, pummeling YHOO down by 12% at one point Wednesday. No surprise there-this is an arrangement where Redmond gets the milk without buying the cow.

Yahoo investors are burning their stock certificates to protest the company's search pact with Microsoft, pummeling YHOO down by 12% at one point Wednesday. No surprise there-this is an arrangement where Redmond gets the milk without buying the cow.Yahoo got the short end of the deal in that it failed to secure a guaranteed, upfront payment from Microsoft in exchange for placing Redmond's Bing "decision engine" on its valuable Internet real estate.

Instead, 88% of the revenue that Microsoft earns from searches on Yahoo properties will flow back to Yahoo. That's a healthy cut, but it offers no guarantees. And, of course, Yahoo retained 100% of all search ad revenues it generated prior to the deal.

Then there's the complex mechanics. Microsoft will license Yahoo's search technology and add it to its own, an arrangement that effectively makes Redmond the IT service provider for the alliance.

Yahoo, meanwhile, handles sales and marketing responsibilities for search and display ads on its properties and on Microsoft's. Those details could prove devilish, says Ovum analyst David Mitchell.

"The implementation of this deal will not be without its challenges," says Mitchell. "There are significant engineering challenges that both companies will need to work through and a substantial change management task to accomplish in implementing the agreement and the vision that it encapsulates."

The upside for Yahoo is that it no longer has to spend millions of dollars developing search technology, only to end up a perpetual also-ran to Google. Yahoo CEO Carol Bartz estimates that the company can cut annual CAPEX by $200 million annually by outsourcing search to Microsoft.

For shareholders, however, that's a meager upside given that Microsoft chief Steve Ballmer at one point last year offered $45 billion to purchase Yahoo outright.

Microsoft, by contrast, appears to be on the right side of the ledger. It grows its meager 8% search share to about 29% percent with the stroke of a pen. The broader reach will attract new customers and allow Microsoft to present itself to advertisers as a legitimate alternative to Google. Any licensing payments to Yahoo are a drop in the bucket for a company that is sitting on $30 billion in cash and equivalents.

Ultimately, however, the big winner hear could be Google. Microsoft and Yahoo said it msy be 18 months before their alliance is fully operational. That's eons in Internet time-and it will give Eric Schmidt and company a big window to cash in on the inevitable FUD factor-some of it legitimate-that will arise as Microsoft and Yahoo work through regulatory, legal, and operational hurdles.

Yahoo shareholders have a few billion reasons to wish Bartz had simply sold the whole shooting match to Ballmer and walked away.

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