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POV: 2015 Update to Yahoo! & Microsoft’s Search Alliance

Mindshare Point of View

Background                                       

In 2009, Microsoft attempted to acquire Yahoo. The deal was rejected but a year later the two agreed on a ten-year joint venture, forming the Yahoo and Microsoft Search Alliance. The purpose of the Alliance was to gain market share and to compete more effectively with Google. In short, Yahoo handled sales for both companies and used Bing’s technology to power desktop searches on Yahoo. This was smart on Yahoo’s part because they intentionally excluded mobile from the deal so they could innovate their own technology, Gemini. Though Bing was not exclusive for Yahoo on mobile it has been the main engine of choice so far.

What has changed?

Five years on and two CEOs later, Mayer and Nadella negotiated more flexibility than their predecessors. There are three key changes to the deal:
 

1. Yahoo will no longer be 100% dependent on Microsoft

From May 1st, Yahoo will be dependent on Microsoft for 51% of its search results, rather than the 100% it was required to pull on desktop before. This means that Yahoo could potentially rebuild its own search engine to answer 49% of search queries. It could alternatively pull search ads from other engines such as Google if it wanted to - however, this is unlikely as Google is already under the spotlight for anti-trust in the EU and the Department of Justice put Google off of a deal with Yahoo in 2009.

2. Yahoo will have more flexibility to develop its technology/or walk out

Previously, Yahoo could only pull out of the Alliance if revenue targets were not met. However, the new terms allow either company to terminate the deal by handing in four months written notice. Will either company terminate the deal early? We think that this is unlikely because Yahoo is still co-dependent on Microsoft’s technology and Microsoft is co-dependent on Yahoo to generate traffic.
Under Mayer’s lead, Yahoo have made it clear that they want to innovate on search, saying that Gemini will eventually serve all of its mobile traffic instead of Bing. Following recent acquisitions, it would not come as a surprise if Yahoo attempts to acquire Foursquare to enhance its local search technology.

3. Their sales teams will sit separately

The new deal means that Microsoft’s sales team will sell Bing ads, and Yahoo’s sales team will sell Yahoo ads. Yahoo believe that splitting the sales teams internally should allow both companies to service advertisers better. Advertisers can expect the transition from Jul 1, 2015 until Jan 31, 2016.

Potential complications

Could the partnership turn into a rivalry? Google’s deal with Apple to be the built-in search engine on iPhones and iPads ends this year. We should expect to see Microsoft and Yahoo competing for this spot. Microsoft is already a favourite since it became the default engine for Siri last year. Yahoo semi-equalised in late 2014, when they signed a deal to become the default engine on Firefox in the U.S. for the next five years. However, if Apple are considering divorcing Google for another player, it may make more sense to go with Microsoft who have already proved themselves as a good catch – as opposed to Yahoo whose technology is underpinned by Microsoft. If Apple divorce Google from search, we may see a resemblance to “Mapsgate” in 2013, putting Apple in the position of explaining to its customers why it removed the best product in favour for its competitive affairs. In summary, Microsoft will need to hire a sales team to sell its Bing ads and Yahoo is re-building the foundations to become a bigger player in the search space.