The full details of the Microsoft-Yahoo search deal were published in an SEC document today. The details were significantly more favourable to Yahoo than the original press release and conference calls about the deal made it sound.
- Microsoft is paying Yahoo $50 million a year for three years above and beyond the revenue share. That’s not a $1 billion upfront payment, but it’s not nothing, either. Why wasn’t this mentioned?
- In Year 5, Microsoft can choose to sell some premium search ads itself, in which case Yahoo’s revenue share will rise to 93%. 93% is a good revenue share–much better than the 88% for the first five years. And if Microsoft takes over sales, Yahoo won’t have to pay sales costs, either, so those 93 cents on the dollar will be almost pure profit. And one of the main headaches of the deal–the split between sales and technology–will disappear. Again, why didn’t Yahoo mention this?
- Yahoo has a couple of key out-clauses that could allow it to ditch Microsoft and, perhaps (with regulatory approval) outsource to Google instead. One is if revenue per search falls below a certain percentage of Google’s. The other is if the combined query share of both Microsoft and Yahoo falls below a certain percentage. We can’t know how likely these break points are to be triggered without knowing what they are, but they will enable Yahoo to keep the pressure on Microsoft to perform.
All these details are good for Yahoo. We’re mystified why the company didn’t report them in the original announcement, especially knowing that it would have to report them later.
The deal is still slightly weaker than we expected (for Yahoo) based on the relative amount the companies needed each other, but it’s certainly better for Yahoo than we originally thought.
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