Yahoo and Microsoft’s marriage will be loveless
AFTER 19 months of will-they, won’t-they courtship, Microsoft has finally tied a knot of sorts with Yahoo. Microsoft will merge Yahoo’s search technology into its own platform, Bing, while Yahoo will handle search ad sales.
For Yahoo, however, this isn’t “happy ever after”. It has been forced into a loveless, arranged marriage because of money worries. In fact, Yahoo staffers hate Microsoft; its suited, grey, corporatist image is anathema to their liberal Silicon Valley values.
The dowry wasn’t that plentiful either. Just over a year ago, Microsoft was offering $33-a-share, or $48bn, for a full takeover of the firm. With Yahoo’s share price now languishing at around $15, giving it a market cap of $21bn, it’s clear that shareholders should have taken the money and ran.
There was also a better offer from Google, a firm that Yahoo has always had a schoolgirl’s crush on. The pair cut a deal that would have let Yahoo use the search giant’s ad technology, providing Yahoo with up to $800m a year in extra revenue. Alas, Google jilted Yahoo at the alter as soon as it realised Microsoft was no longer interested in a full takeover.
Compared to these potential deals, the current tie-up is far less compelling for Yahoo. In return for $500m in annual operating income and $200m in cost savings, it is giving up something it can never regain: its independence.
It will stop developing its own search engine and become a good wife that looks after the customers, while Microsoft will manage the serious, technical stuff, darling.
Analysts had been expecting Yahoo to get an upfront payment of between $1bn and $2bn when it inked the well-trailed deal with Microsoft, but it was nowhere to be seen. Contrary to Yahoo boss Carol Bartz’s claim that the deal has “boatloads” of value for Yahoo shareholders, it’s clear that Microsoft chief Steve Ballmer is the one who is wearing the trousers.
For Microsoft, this is a well-cut deal. Having spent a decade and $10bn on internal efforts to compete with Google, Bing – the search platform it launched last month – is its best shot yet. In the US, Bing will now account for almost 30 per cent of searches, giving it the critical mass to stage an assault on its arch rival. Globally, the picture is less good, with Bing’s market share falling to 12 per cent, and even lower in the UK and Europe.
Even in the US, however, Microsoft will struggle to take on Google because internet search is a winner-takes-all market. Google gets more searches than anyone else, so it produces better results and displays the most relevant ads, which keeps consumers coming back, a process that serves to make the results better still. This cycle will be very hard to break.
The current search deal will last for the next 10 years. After that, Microsoft will probably divorce Yahoo, and what is left will be much-diminished: a brand that is dining out on past glories and an advertising sales team. Who will want to marry it then?