From Doug Anmuth at Barclays, here’s one point that crystalizes why the Yahoo-Microsoft deal will be such a management nightmare–and why it’s a lousy deal for Yahoo:
[F]or the deal to work for Yahoo!, it needs to maintain its search market share, or not lose much of it. Microsoft is guaranteeing revenue per search by country for the first 18 months after implementation, but not revenue itself. Additionally, if Bing takes share directly from Yahoo!, Yahoo! won’t directly benefit as it will receive no economics from premium advertiser clicks on Bing even though Yahoo! is selling the ads.
There are two critical points there. Let’s take them one at a time.
First, Microsoft is guaranteeing revenue per search by country for the first 18 months after implementation, but not revenue itself.
Translation: If Yahoo’s share continues to slip, Yahoo’s revenue will drop–the same way it would have if Yahoo had kept running the business for itself. This is why the upfront payment would have been better. It would have lessened the risks to Yahoo and put the onus of performing more squarely on Microsoft’s shoulders.
Second, if Bing takes share directly from Yahoo!, Yahoo! won’t directly benefit as it will receive no economics from premium advertiser clicks on Bing even though Yahoo! is selling the ads.
Let’s hypothesize for a moment that Bing will actually take significant share of the search market (we don’t think it will). Who is that share going to come from? In our opinion, it’s more likely to come from Yahoo and other search players than it is from Google. That would happen with or without the deal, except that now that Yahoo has thrown its eggs in the Microsoft search basket, it has helped Bing’s chances a lot.
This aspect of the deal puts Yahoo and Microsoft in direct competition with one another, even as they are supposed to be working together. Every query that Microsoft steals from Yahoo will generate 88 more cents on the dollar than Microsoft would have gotten if Yahoo had kept the query itself. Think that’s a big enough incentive for Microsoft to keep trying to steal share from Yahoo?
The more galling part, as Anmuth explains, is that Yahoo’s salespeople will be selling ads on Bing that Microsoft gets 100% of the revenue for. Yahoo can’t limit the search ads it sells to running only on Yahoo. It has to run them across the entire Bing environment. That means, if someone clicks on the ads when they’re in the Microsoft environment–or if they go direct to Bing–Microsoft will get 100% of the revenue. So Microsoft has even more of an incentive to keep stealing share from Yahoo.
Yahoo, by the way, will have to pay its salespeople to sell those ads–they won’t do it for free. Which means that Yahoo will take a loss on every Yahoo-sold ad that runs on Bing somewhere other than Yahoo.
Tell us again how that’s a good deal for Yahoo?
Business Insider Emails & Alerts
Site highlights each day to your inbox.