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Yahoo – Microsoft and Yahoo Are Linked Up. Now What?

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Yahoo – Microsoft and Yahoo Are Linked Up. Now What?

Yahoo,  The bumpy, marathon mating dance between Microsoft and Yahoo finally concluded on Wednesday, when the two companies announced a partnership in Internet search and advertising to take on the industry powerhouse Google.

But there was plenty of skepticism about whether the new partners could make a serious dent in Google’s dominance.

Even with the deal, the Microsoft-Yahoo search operation will be dwarfed by Google — with a 28 percent market share in the United States, versus 65 percent — and will face an uphill struggle to try to wean people away from Google’s simple white search page.

If Yahoo and Microsoft cannot persuade people to switch, they will not build the larger audience that will bring in more revenue from ads tied to searches.

“This battle is won or lost as the user sits at the keyboard,” said Peter S. Fader, a professor at the Wharton School of the University of Pennsylvania and co-director of its Interactive Media Initiative. “Google is winning for good, consumer-friendly reasons. You can’t just buy that.”

The Microsoft-Yahoo pact represents a pragmatic division of duties between the two companies, instead of the blockbuster deal Microsoft, No. 3 in the search market, was shooting for last year when it bid $47.5 billion to buy Yahoo, No. 2 in search.

That hostile offer was ultimately withdrawn by Microsoft, and its collapse led to lots of soul-searching at Yahoo and the replacement of its co-founder Jerry Yang with an outsider, Carol Bartz, in the chief executive role.

Under the pact, Microsoft will provide the underlying search technology on Yahoo’s popular Web sites. The deal will give a lift to Microsoft’s search engine, which it recently overhauled and renamed Bing. Its search ads will have broader reach and become more lucrative.

Bing, which tries to put search results in better context than rivals, has won praise and favorable reviews, after Microsoft spent years falling farther and farther behind Google in search.

For Yahoo, the move furthers the strategy under Ms. Bartz to focus the company on its strengths as a publisher of Web media sites in areas like finance and sports, as a marketer and leader in online display advertising.

“This deal allows Yahoo to invest in what we should be investing in for the future — audience properties, display advertising and the mobile Internet experience,” Ms. Bartz said in an interview on Wednesday. “Our vision is to be the center of people’s lives online.”

The terms of the 10-year agreement give Microsoft access to Yahoo’s search technologies. Yahoo will receive a lucrative 88 percent of the search-generated ad revenue from its own sites for the first five years of the deal, much higher than is standard in the industry.

After the takeover bid failed, the companies renewed talks about a partnership last summer. The talks included discussion of a large upfront payment from Microsoft.

But when Ms. Bartz joined Yahoo at the start of this year, the interest on the Yahoo side shifted. Ms. Bartz was more interested in steady revenue to ensure the longer-term financial health of Yahoo instead of a big payment, she said in a conference call Wednesday.

Shares of Yahoo fell 12 percent, to $15.14, after the deal was announced, apparently reflecting investors’ disappointment in the lack of a payment. Shares of Microsoft rose slightly.

“It feels kind of like a stab in the chest,” said Darren Chervitz, the co-manager of the Jacob Internet Fund, which owns about 100,000 shares of Yahoo. “It certainly feels like Yahoo is giving away their strong and hard-fought share of the search market for really a modest price.”

Now, Yahoo’s financial fate will be inextricably linked with Microsoft for years. “My sense is that Yahoo will regret making this move,” Mr. Chervitz said.

If the deal is completed next year as planned, and after the partnership is fully in place in three years, Yahoo estimates that its operating income will increase by $500 million a year, based on the anticipated higher search traffic and ad revenue, and a substantial drop in its investment in technology development.

Steven A. Ballmer, Microsoft’s chief executive, said in an interview that Ms. Bartz had driven a hard bargain. “Look,” he said, “she got 88 percent of the revenue and none of the cost.”

Still, Mr. Ballmer added that he won something he badly wanted as well: “I got an opportunity to swing for the fences in search.”

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