Microsoft and Yahoo Sign Deal, Ink Partnership

Microsoft and Yahoo have had an on-again / off-again relationship for years, often whipsawing from one extreme to another. This time, however, it's official, agreed upon, and public. The two companies have signed an agreement aimed at improving their competitive position against Google. Yahoo executives characterized the deal as providing a "boatload of value" as opposed to the "boatload of cash" Microsoft offered back in February of 2008. Microsoft's first deal was a purchase offer with a $44.6 billion check, but the offer died on the table when then-CEO Jerry Yang refused to consider it.

This time around, the two companies are partnering up in a key area rather than trying to combine. Beginning in early 2010, Yahoo will phase out its own search engine and replace it with Bing, Microsoft's latest search engine. Users who run a search from Yahoo's homepage or a Yahoo-affiliated site will still see the Yahoo brand, but a link at the bottom of the page will inform the user that the search is "Powered by
Bing." As for revenue, the two companies have come to an arrangement in which Yahoo will receive 88 percent of whatever the RPS (Revenue per Search) is, while the other 12 percent goes to Microsoft. Said agreement governs the first five years of the ten-year arrangement, but neither company would comment on what RPS-sharing rate they might agree to come 2014. For the first 18 months of the five years, moreoever, Microsoft is guaranteeing Yahoo's RPS rate at a certain level. No matter what happens, in other words, Yahoo has 18 months to simultaneously transition to Bing and improve its own revenue stream.

Paying Redmond 12 percent of its RPS will impact Yahoo's revenue, but the company expects to save a great deal of cash by agreeing to this arrangement. Yahoo believes this new joint arrangement will improve its operating income by $500 million, reduce capital expenditures by $200 million, and increase operational cash flow by $275 million. Microsoft, for its part, doesn't see this as a deal that'll have an immediate positive impact, but company representatives indicated that the software giant believes it can recoup its investment (and make money) over the longer term. The point of all this, of course, is to better compete with Google. The newly formed Microhoo! venture would account for some 30 percent of search engine traffic, and while that's a clear minority, it's more than enough to catch the eye of companies that might otherwise have gone with a Google-only option.

By presenting a united front, the theory goes, advertisers are more likely to invest in paid search with the two companies combined than they would if the two remain separated. Investors seem a tad unsure of what to make of this new venture, particularly since MS and Y! will remain competitors in a number of other areas. Both portals will remain separate and distinct entities, and both will compete for displayed advertising. This last may have been a nod to regulators, who are sure to view any partnership in the search oligarchy with a gimlet eye. For all the fanfare of the announcement, it'll be up to the government as to whether or not this partnership bears fruit. If you want more information from the companies themselves, they've launched a joint website explaining the move