Bingoo!

tauringhuang.

Jul 30th 2009 | SAN FRANCISCO
From The Economist print edition

The world’s biggest software firm and web portal team up to challenge Google


USERS will probably not notice the difference. But the deal between Microsoft and Yahoo!, the world’s biggest software firm and the leading web portal, for a ten-year partnership in searches and advertising on the internet, may one day be seen as a momentous event. The combination, which was announced on July 29th after years of speculation about a tie-up, is not as far-reaching as originally envisaged. But it is likely to create a serious rival to Google, the online giant that dominates both of these activities.

The agreement is supposed to help both parties overcome their most pressing problems. Microsoft will significantly increase the use of its search service, called Bing, and its platform to place online advertisements, because Yahoo! will use both of them on its websites. The web portal, for its part, will be able to cut costs and increase revenues. Yahoo! will no longer have to invest millions in its search and advertising technology, both of which it will hand over to Microsoft. It will also get more money for the ads placed next to its search results. Carol Bartz, Yahoo!’s chief executive, said that the tie-up “comes with boatloads of value” for her firm. During the first five years of the deal, it will receive 88% of the revenue generated by ads next to search results on its web page.

The deal is the result of a long mating dance which started in February last year when Microsoft made a $44.6 billion takeover bid for Yahoo!, later raising its offer to $47.5 billion. But Yahoo!’s bosses rebuffed Microsoft, saying the offer undervalued their firm. Instead Yahoo! made an agreement with Google on advertising, only to see it scuppered by concerns that antitrust objections could lead to protracted legal wrangling. Talks between Microsoft and Yahoo! were rekindled after Ms Bartz took the helm at Yahoo! in January. She is less emotionally attached to maintaining its independence than her predecessor, Jerry Yang, one of the company’s founders.

Despite Ms Bartz’s cheerleading, investors were disappointed. Yahoo!’s share price fell by 12% after the announcement. The firm is said to have pushed for an upfront payment of billions of dollars, but has not received one. What is more, the deal covers only text ads displayed alongside search results and not other forms of online advertising. On the plus side, Yahoo! will sell higher-priced search ads for both firms, allowing it to maintain relationships with advertisers.

The combination may in time be able to threaten Google’s dominance in web search. The deal will mean that Microsoft handles nearly 30% of searches in America, compared with Google’s 65%. As it is, Bing is gaining ground, and Microsoft will now have more data with which to improve it. Even more important will be the challenge to Google’s lucrative business in search-related ads, a market which it dominates even more with a share of over 70% in America.

Earlier this month, Google announced that it is developing a free operating system for personal computers called Chrome OS, thus mounting a direct attack on Microsoft and Windows. With the Yahoo! deal, Microsoft is now pushing into Google’s heartland. The battle lines between the technology titans are becoming ever clearer.