Clear76° FULL FORECASTClear76° FULL FORECAST
Make us your home page
Instagram

Microsoft-Yahoo deal sets up battle with Google

Pedestrians walk by a Yahoo sign in Times Square on Wednesday. Microsoft and Yahoo announced they have reached a 10-year partnership that will allow them to capitalize on their respective strengths: Microsoft’s new search technology and Yahoo’s audience.

Getty Images

Pedestrians walk by a Yahoo sign in Times Square on Wednesday. Microsoft and Yahoo announced they have reached a 10-year partnership that will allow them to capitalize on their respective strengths: Microsoft’s new search technology and Yahoo’s audience.

SAN FRANCISCO — Microsoft finally persuaded Yahoo to surrender control of the Internet's No. 2 search engine and join it in a daunting battle — taking on the overwhelming dominance of Google in the online advertising market.

A 10-year deal announced Wednesday gives Microsoft its best shot yet to show its new search technology, Bing, is as good as or better than Google's. Microsoft also hopes to use Yahoo to divert sales from Google, which generates more than $20 billion a year from ads.

Gaining access to Yahoo's audience would instantly more than triple Bing's U.S. market share to 28 percent. That's still a far cry from the remarkable 65 percent of U.S. searches handled by Google, according to the research firm comScore Inc.

By joining forces, Microsoft and Yahoo are betting they will be able to focus on their respective strengths. By turning over responsibility for search technology to Microsoft, Yahoo can concentrate on sales of billboard-style advertising on the Web — and figuring out how to keep luring traffic to its Web sites, which already attract more than 570 million people worldwide every month.

While the agreement shapes up as a potential boon for Microsoft, it was greeted in the stock market as a letdown for Yahoo. Just 14 months ago, Microsoft dangled $9 billion in front of Yahoo in an attempt to forge a search advertising partnership, only to be rebuffed. Yahoo also had turned down Microsoft's $47.5 billion bid to buy the entire company.

Yahoo has been struggling so badly since then that Microsoft isn't paying any money in advance. Instead, it will give Yahoo 88 percent of the search ad sales made on its Web site, above the usual commission of 70 to 80 percent.

By spending less on its own search technology, Yahoo expects to boost its annual operating profit by about $500 million — but not until 2012, when the two companies expect to have all the pieces of a complex technological puzzle in place.

"I think a lot of people are kind of looking at the numbers and seeing a lot of question marks where they expected to see exclamation points," said Scott Kessler, a Standard & Poor's equity analyst.

Yahoo Inc. shares plunged $2.08, or 12 percent, to $15.14 as investors expressed disappointment over the absence of an immediate windfall. Microsoft Corp. shares gained 33 cents to $23.80 while Google Inc. shares shed $3.61 to $436.24.

Yahoo will have limited access to the data on users' searches, which yield insights that can be used to pick ads more likely to pique a person's interest. The value of that information is why Microsoft wants to process more search requests.

Deal has a built-in antitrust advantage

The Internet search partnership between Microsoft and Yahoo faces a tough antitrust review in the U.S. and overseas, but the deal may have a better shot than the proposed Yahoo-Google pact last year. That's because antitrust regulators tend to be much tougher on deals involving the top two companies in an industry, said Evan Stewart, an antitrust lawyer at Zuckerman Spaeder. Google is by far the leading search engine, with two-thirds of the U.S. search market, according to comScore Inc.; Yahoo is well ahead of Microsoft in the next two spots.

Microsoft-Yahoo deal sets up battle with Google 07/29/09 [Last modified: Wednesday, July 29, 2009 11:26pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...