Wednesday, 29 July 2009

Yeehah or Boohoo?

"Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers, and real consumer choice in a market currently dominated by one company."

You have to pinch yourself that these were the words of Microsoft CEO, Steve Ballmer, as he finally welcomed a deal with struggling search and advertising company, Yahoo! It's a very different deal to the proposed acquisition last year which Yahoo rebuffed only to see their revenue, profits and share price plummet as their dependence on advertising margins got found out in a tougher market. Microsoft too have not found it easy, with sales slipping for the first time ever and redundancies announced earlier in the year as profits stalled.

It doesn't sound like the ideal marriage.

The words were also a little hypocritical as Microsoft still dominate the PC market for operating systems and office software, with similar market shares to Google's on search and advertising. The fact is that Google has innovated and sold superbly, leaving Microsoft and other rivals in its wake.

The new deal, sees Yahoo losing control of its search engine in return for 88% of all sales from search and advertising on its site for the first 5 years of the deal and it has have the right to sell adverts on some Microsoft sites. In the complex world of advert syndicating, impressions, click throughs and footfalls etc, this is seen as a mixed deal. Yahoo staff will almost certainly feel the knife over the next 2 years, having already been at the receiving end after falling profits, although some staff may transfer to Microsoft as part of the deal.

For Yahoo CEO, Carol Bartz, this is seen as landmark deal which could not have been done by someone like the founder, Jerry Yang, as there would have been too much emotional attachment to the search engine. The history of the on-off deals with Microsoft stems back to a rebuffed $47bn offer of cash and shares by the software giant. Later Yahoo struck a technology deal with rival Google which must have incensed Ballmer at Microsoft and sure enough anti-trust law stepped in to scotch the deal soon after. November last year saw Yang step down as boss and Bartz assume control and the ex-software executive, who masterminded Autodesk's extraordinary transition from high-end, cumbersome software behemoth to a fast-moving, almost consumer-orientated company, started to resurrect the deal. A lot of eyes were on Bartz as she is not known as a web-savvy operator but this deal marks something of a major coup for her as it is reckoned to be worth around $500m in incremental revenue and release about $200m in much needed savings.

In the hiatus, Microsoft launched a new search engine, called bing, which has had very little impact on Google and the usual tactics of embedding it as the preferred search engine in each new PC has not been done. Google still rules supreme here. The new deal, gives Microsoft about a 30% market share of the online ad market - the kind of figure not easily understood in a world where Microsoft usually is 70% of the market.

It is interesting psychology, but in the conference call to announce this tie-up, in 45 minutes not once did either CEO mention Google but the unseen enemy was indeed implied. Gagging in Ballmer's throat was the apparently positive thought of becoming a strong number two in the market.

In reality, this is a steamroller by Microsoft. Yahoo has lost control of its most prized asset in an attempt to rescue the company's fortunes. For Bartz, this would have been the equivalent of Autodesk giving Microsoft the rights to the software code of AutoCad - it's that bigger loss. In return, Yahoo gets to hang on to Microsoft's coat tails in an effort to compete with Google by dint of partnership and size rather than in technology. How Jerry Yang and the staff feel about this must be horrible, but then again, they were the ones who turned down $33 a share. Now the price is less than 50% of that.

For Bartz, this was perhaps her only option. But it is the equivalent of giving away the engine of a Ferrari in return for a larger share of the market - the Ferrari would never be the same again.

Rather than Google killing Yahoo, the latter has surrendered. For Microsoft, it will be interesting to see what they can do with a Ferrari engine inside a clapped out old Chevy.

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