The Microhoo deal looks good to me because the parts are in the right places. In other words, the deal maximizes the strengths of each of the two players. Microsoft is essentially going to be providing technology in the form of the Bing search engine and the Ad Center advertising engine. Yahoo will provide the traffic.
What does this mean for these two companies and for Google? Techcrunch has a good transcription of Carol Bartz and Steve Ballmer going over it. The companies moved away from any big up front payments and have focused on ongoing revenue. I’m sure that’s a good thing for Bartz, who is probably trying to put as solid a foundation as she can under Yahoo’s revenue.
These articles all seem to provide a lot less detail about how Microsoft will quantify benefits, however. I have been feeling for some time that it might be a good plan for Microsoft to divest its consumer web properties to Yahoo. Unfortunately, Yahoo is in a lousy position to pay up. In fact, they’re actually planning to move expenses in the form of engineers off their books and onto Microsoft’s.
The deal does, however, give Microsoft a huge shot in the arm in terms of Search share. It leaves Microsoft and Google neatly splitting most of the remaining search share, although Google continues to have to Lion’s Share of search (about 65%). In exchange, Microsoft will pay Yahoo a whopping 88% of the search revenue in so-called Traffic Acquisition Costs. At least they’re simply giving up the incoming revenue rather than paying cash sweeteners. And, the deal is for 10 years, plenty long enough to cover the tenures of Ms Bartz and Mr Ballmer.
Despite the long term of the deal, the companies have budgeted 2 years of transition just to get it all operating. That’s a typical Microsoft development timeframe, but it certainly does not reflect living in “Internet Years.” Hopefully that’s a conservative estimate they can beat. If it takes 2 years to get this thing up and running there’s no telling what kind of moving target Google will be able to put up between now and then.
All in all, it seems a reasonable deal. MSFT gets to continuing trying to steal share from GOOG with a big uptick from this deal alone. They’ll be fighting a guerilla war from here on out. YHOO gets an immediate revenue boost and some significant Opex relief, making their numbers look better. There’s nothing too earth shattering here, no big acquisition, and no silver bullet against Google, but it is a credible effort. Google, meanwhile, is going to find it harder and harder to continue to steal share. They have regressed to the mean and will now grow at the overall rate of the market, because they are the mean with so much share. The implication is that they need a new growth engine, and until they get one, they will need to focus on profitability through expense controls.
As I wrote some time ago, their anti-gravity ray has failed and they are now earthbound. The same could be said of Yahoo’s share price. It’s a great pity for shareholders that management didn’t take that big juicy merger offer made lo these many months ago. In the end, said management got tossed and Yahoo shareholders got a much worse deal. OTOH, MSFT shareholders are getting most of the value at a much more reasonable price.
Seth Godin writes an interesting post about win, place, or show. Microhoo is definitely about showing. They’re a long ways from figuring out how to win. Larry Dignan is a lot less kind. He says they’re set up to be the new AOL.
What do you think?