Yahoo! and Microsoft Search Partnership: Does Bing Plus Yahoo Equal Boogle?

On July 29, 2009 Yahoo! Inc. and Microsoft Corp. announced a 10-year strategic search partnership whereby Microsoft’s Bing search engine will be the default search engine for Yahoo!, with Yahoo! selling the search ads for the platform. The terms of the deal are that Microsoft will pay to Yahoo! a TAC (traffic acquisition cost) of 88% for the first 5 years of the partnership on all search advertising on its O&O (owned and operated) and affiliates sites as well as guarantee Yahoo!’s RPS (revenue per search) in each country for the first 18 months. Yahoo! expects the partnership to negatively impact net revenue (due to the 12% revenue share with Microsoft) but generate $275 million in incremental EBITDA, given $650 million in costs savings associated with outsourcing search technology. Capital expenditure savings are expected to be $200 million. In post-announcement trading, Yahoo! shares traded down $2.08 or 12.08% while Microsoft shares traded up by $0.33 or 1.41%.

It seems that while both companies come out ahead on this deal, Microsoft appears to be the bigger winner as it is now able to extend its recently upgraded search engine, Bing, to Yahoo!’s large online audience as well as gaining an all-pass access to users’ search data. Timing of the deal also plays into Microsoft’s favor as this current deal comes at a cheaper price and has been estimated to cost $3.00 per share versus $5.30 per share one year ago.

For Yahoo! the deal allows Yahoo! to turnover the keys to its market share losing search engine, while channeling focus on what it does best which is building an Internet audience and selling online advertising. However, absent from the deal terms was any upfront payment, compensation for any improvement from RPS in Bing searches (if Bing takes share from Yahoo! going forward, Yahoo! is not entitled to share in the success), and higher level of TACs than the 88% stipulated. In addition, Yahoo! will have limited access to data in users’ searches going forward.

How does this impact the Internet search industry overall? Answer is not much, at least not right away. The two companies estimate a 24 month integration time post regulatory approval. The real winner in the near term could be Google which is likely to pick up share during the disruption period. Google is still the 800 pound gorilla in search with a 65% market share in the United States and 67% globally vs. a combined Bing and Yahoo share of 28%.

So Microsoft has doubled down on search at a time when Google has announced the development of its own OS -- time will only tell how the Yahoo! / Microsoft partnership will exactly play out but one thing for certain is the head-to-head battle between Google and Microsoft on each other’s core territory.