- The Washington Times - Thursday, July 30, 2009

Yahoo Inc.’s 15-year battle for online search supremacy ended with a whimper Wednesday when it signed away control of its trademark search platform to Microsoft Corp.

Microsoft proved that persistence pays off as the software giant finally inked a deal with Yahoo after years of wooing the slumping Internet firm to team up in a fight against market leader Google Inc.

Microsoft is taking over Yahoo’s search platform under the 10-year-deal, replacing it with Bing, the Redmond, Wash., company’s newly revamped search engine. That allows the software maker to tap into the Web’s second-largest search audience in its quest to win over users from Google, which dominates both online search and advertising.

Capping a saga reminiscent of a soap opera love triangle, Wednesday’s terms are a far cry from the overture made by Microsoft last year, when Sunnyvale, Calif.-based Yahoo spurned the suitor’s $47 billion takeover offer. This time, Microsoft will not pay any money upfront, but rather will let Yahoo keep 88 percent of the search advertising revenue for the first five years.

“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 a single company,” Microsoft Chief Executive Officer Steve Ballmer said.

But the move also closes the door on what many consider the original Internet search engine, established by two Stanford University electrical engineering graduate students - David Filo and Jerry Yang - during the 1990s ramp-up of the Internet.

The two were soon supplanted by another pair of Stanford grad students, Sergey Brin and Larry Page, whose Google search engine surged ahead in large measure due to its methods of combining searches with advertising links. Yahoo, a survivor of the 2001 dot-com crash, has struggled to keep pace since then.

Microsoft said the deal will give Bing, a search engine launched June 3, “the scale necessary to more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results.”

One analyst said this would give Bing more of the approximately 30 percent of online searches that do not use Google.

“For Microsoft, I think this [deal] is good,” said Mary-Jo Foley, a veteran technology journalist and Microsoft blogger. “They get rid of the No. 2 search competitor; they’re now providing the search engine for Yahoo; and Microsoft doesn’t have to shell out $47 billion to get Yahoo’s search [volume]. It’s helpful to them to get a little bit more leg up against Google.”

Another longtime technology watcher, Rob Enderle, principal analyst at the Enderle Group in San Jose, Calif., said the deal was “probably better than the merger was going to be. The combination of the two companies leaves the best of both intact. If they’d run the companies together, it would have been a bloodbath on the Yahoo side.”

Now, Mr. Enderle said, “Yahoo can go back to trying to find whatever future it’s entitled to.”

Yahoo said it expects to rake in $500 million more in operating profits this year and save $200 million on capital expenditures as a result of the deal, which the companies hope to close next year.

Yahoo Chief Executive Carol Bartz said an undetermined number of Yahoo engineers will be laid off but stressed that the partnership means the firm will be able to boost investments in display advertising and other areas.

“This agreement comes with boatloads of value for Yahoo, our users and the industry,” she said.

Ms. Foley said the addition of Yahoo’s searchers to the user base of Microsoft’s Bing will offer the nascent technology a powerful boost.

“The way search and online advertising works, the bigger your base, the better your results,” she explained. “With only 8 percent [market share], Bing’s relevance was questionable. Now, 30 percent will help improve the overall accuracy of the search.”

While Google may try to derail the deal on antitrust grounds, Ms. Foley believes the larger question is just what each side will get, in dollar terms.

“I think people are having trouble figuring out what they’re really going to get,” Ms. Foley said of Yahoo’s “take” from the transaction. “It’s not just a straight payment, which a lot of people thought they were going to get up front at first.” Instead, she noted, it will be “based on how many people do searches with them. The amount they’re going to get out of this is a little squishy.”

Investors largely panned the news since it doesn’t include an immediate cash infusion. Shares of Yahoo sank $2.08, or 12 percent, to close at $15.14 on the Nasdaq Stock Market. Microsoft shares climbed 33 cents, or 1.4 percent, to $23.80. Google shares fell $3.61, or 0.8 percent, to $436.24.

Mr. Enderle believes the deal is a clear shot across Google’s bow.

“This thing is going to wake the hell out of Google,” Mr. Enderle said. “This is scary for Google. They kind of needed a boot. … When you get a company that goes unfocused, they can go south pretty fast.”

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