Yahoo & Microsoft: Bada Bing!

Thursday, July 30th, 2009

The commentary on the much-ballyhooed deal between Yahoo and Microsoft to join forces in search appears to be missing the point. It’s not really about anyone threatening Google’s market share in search, it ’s about increasing revenue in the share they control. The deal allows Yahoo to focus on its strength (Display Ads), while allowing Microsoft to use its engineering prowess to increase revenue per search by improving tools for advertisers to serve ads on Yahoo’s search results.

This is more about Yahoo! exiting the search game – which one could argue they did when they hired Terry Semel (25 years at Warner Bros). Remarkable when you compare to Google’s choice, Eric Schmidt (of Sun and Novell). Could you have a more clear symbol of changing attitudes and direction, as if shouting one will be an entertainment company and one a technology company? This point has been made before, but I believe this deal was really made at the point of hiring Semel (and their decision not to purchase Google when they had a chance – something we’ve seen before Coke not buying Pepsi about 50+ years ago).

Yahoo historically has had trouble with keeping up with Google’s engineering on a lot of levels (i.e. Project Panama, or the successful scramble to answer gmail outlined in Chris Anderson’s new book, Free! Why the $.0.00 Is the Future of Business). Yahoo lost the search game because of the inability to innovate engineering solutions to allow individual advertisers to easily purchase and manage search ads, and the lead was only trending wider. However, Yahoo remains strong as an online publisher of content, and needs to focus on monetizing their Display content network (not included in the deal).

This engineering weakness of Yahoo in the self-service advertising platform created a serious block in efforts to increase revenue per search. This is why it makes sense for Microsoft, with its engineering muscle, to give it a shot – the self-serve advertising will go through Microsoft’s AdCenter system.

We believe this deal will have early bumps, but that on a macro basis this should help make Yahoo stronger and more focused, while it allows Microsoft to try to tackle increasing Search Ad revenue for the Yahoo search audience through improvements in ad serving and reporting technologies – not necessarily via improved search algorithms to generate increased search market share vs. Google.

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