Inside the Microsoft-Yahoo Deal, and the Future of the Search Competition with Google

Eric Hal Schwartz7/29/09Comments (2)

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sales and advertising groups, and outside of the search engines, will still compete with each other.

The employment situation for both companies is still uncertain. Ballmer said he expects some computer engineers from Yahoo will migrate to Microsoft (as has often happened before), since Yahoo will no longer need them. Bartz added that some Yahoo employees may be let go, but slowly, over the next few years.

It may seem like Yahoo gets the short end of the stick in this deal, until the revenue sharing aspect of the agreement is examined. Under the deal, 88 percent of the money made through the deal, referred to as “traffic acquisition costs,” goes to Yahoo, for at least the first five years. In the short term at least, Yahoo stands to make a lot more money from the deal than Microsoft, but Ballmer said this deal is about much more than the short term.

Online search is so heavily dominated by Google that it can be easy to forget that Yahoo still has about one-fifth of the market share. Therefore, Bing, with 8 percent of the search market, will take a huge leap ahead in the search market and, ideally for Microsoft, become a real competitor to Google. With Yahoo’s search engine to augment its own, and access to a vastly larger group of users to tailor search and advertising to, it is not inconceivable that by the end of this ten-year agreement, we will see a real competition between Microsoft and Google—although what will happen to Yahoo is anybody’s guess. Perhaps Microsoft will even make another attempt to acquire the company as it did last year, when Yahoo rejected a $45 billion offer.

The next step is getting the agreement approved by regulatory commissions, both governmental and industrial. If all goes well, Yahoo and Microsoft hope to have the deal close sometime early next year. “This agreement gives us the scale and resources to create the future of search,” Ballmer said in the release.

Eric Hal Schwartz was an intern in Xconomy's Seattle office.