Young and Successful

According to Silicon Valley analysts, the combined team of Yahoo and Microsoft will account for 28% of the online search marketing, while Google alone has a massive share of 65%. So it is viewed as a strategic ploy to counter Google and put a dent in its online presence.

Last February, Microsoft offered to buy all of Yahoo for $40 billion. Last summer, Microsoft offered to buy Yahoo’s search business for $1 billion. When it made its initial takeover offer in February 2008, Microsoft said it wanted to buy Yahoo to compete more effectively with Google in online search and advertising, two related markets where Google is the runaway leader. Both Microsoft and Yahoo have spent billions trying to best Google in search and advertising, and both have failed so far.

After the takeover bid failed, the companies renewed talks about a partnership in the summer of 2008. The talks included a discussion of a large up-front payment from Microsoft. But when Carol Bartz became Yahoo’s CEO at the beginning of 2009, the company’s emphasis shifted. She was more interested in steady revenue to ensure the longer-term financial health of Yahoo instead of a big one-time payment. Yahoo estimates that after the partnership is fully in place, the company’s operating income will increase by $500 million a year, based on higher search traffic and ad revenue, and a substantial drop in its investment in search technology.

Although Yahoo and Microsoft could soon be working together on Internet search, their collaboration would mostly occur behind the scenes. Consumers would still see Yahoo’s logo striped across Yahoo.com. The only nod to Microsoft would appear when a user gets results from a Web search. At the bottom of the page Bing, Microsoft’s search engine, will get credit for providing the results. While it handles search requests at Yahoo, Bing would still be fielding queries at MSN.com, Bing.com, and other Web sites owned by Microsoft. And nothing figures to change in the way Microsoft accepts search requests from cell phones and “toolbars” added to Web browsers.

The Yahoo-Microsoft deal is noteworthy because it aligns two of the Internet’s most powerful players in an attempt to take search kingpin Google down a notch or two. But it’s common for one Web site to rely on another company to run its search engine and/or the ads the show up alongside search results. Why all the competition? Because advertisers bid for the right to show their ads alongside certain search terms. The marketers pay the search engines when a user clicks on an ad. That means Microsoft and Google are trying to make the audiences for their search engines as vast as possible. The more eyeballs they have, the more advertisers are likely to pay.