Notes From Yahoo-Microsoft Conference Call On Search Deal

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LIVE notes from Yahoo’s conference call for its Microsoft search deal.

8:36 Finally in the call after a long delay. Yahoo did not have working link to Webcast on its Investor Relations site, Microsoft had no link at all.

8:36 Carol explaining the basics of the deal: Let Microsoft work on search, Yahoo on media.

8:38 Deal doesn’t cover display. For everyone, it’s about scale. By combining scale, can offer real, viable alternative [to Google]. Better searches and more relevant ads for users (yay!).

8:39 For publishers, better avenues to reach the users they care about. Better bids for search syndication deals. Combination will provide scale for rapid improvement and put choice back into hands of consumers, advertisers, and publishers.

8:40 Steve Ballmer joins and says the same stuff. At its heart, the deal is about realising efficiencies.

8:41 Search scale we’ll get for Bing will allow us to provide greater innovation. More momentum for Bing. Better ROI for advertisers. “And I think it’ll help the industry as a whole to prosper.” “Super-excited to see this relationship fluorish and come to life.”

8:42 Back to Carol. Going over terms of agreement. Exclusive, 10-year licence to Yahoo’s core search technology for Microsoft. Yahoo will become exclusive worldwide relationship sales force, but each company will maintain display ad sales force.

8:43 88% rev share to Yahoo. Some financials: Revenue will come down a bit due to share, operating income $500 million higher, will save $200 million a year on capex. Not including reinvestment amounts in forecasts.

8:44 Expect to close deal by early 2010. Will then go through transition, major markets to Bing 3-6 months after close. Full global transition will take up to 24 months.

8:46 Q&A.

8:46 How big RPS gap? Risk to Microsoft if can’t match?

8:46: Carol: On the display side, wanted to keep as simple as possible. Already a lot of technology that the two companies are merging together. Just makes sense to be straightforward and do the search business. Ballmer: We’re taking a big bite here. Search is a more well-known thing when it comes to automation in the ad selling process. Still a lot of innovation to have that on the display side. Whatever we each do will then serve the market with a common data set coming out of search experience. RPS gap: We and Yahoo are sort of close; behind Google; some of that is scale. Deal will let us close gap to market leader. I anticipate with smart use of technology from Yahoo plus our own work, don’t expect negative consequences for P&L.

8:49 Q: You moved from deal that would generate a boatload of cash to boatload of “value.” Why no upfront fee? Help quantify RPS? What is rev share after 5 years?

8:50 Carol: What was really important to Yahoo is a deal that flows successfully through P&L. Cash upfront doesn’t help us from operating perspective. Wanted good TAC rate to invest in the business. Important for us to preserve our revenue line. After 5 years, we’ll see if Microsoft elects to go back and do some of the sales. Too hard to explain in this kind of forum. RPS run rate? Ballmer: Basic proposition is you take current revenue search mix that Yahoo has, RPS they derive, Microsoft is guaranteeing it. 12% goes away, cost goes away too. If everything looks the same, ensures that revenue only varies by TAC amount.

8:52 Ballmer: Upside is better job being relevant, improve monetization on Yahoo and Microsoft site, good opportunity for upside there. All upside comes as execution really builds. Carol gets an upside in terms of cost. For Microsoft, investment will be a few hundred million over first few years. A lot of work in transition, and expense associated with it.

8:54 Some additional Capex, Ballmer says, nothing crazy in fy10. From an opex perspective, we have a plan in which, over time, some Yahoo engineers may move to Microsoft. Better talent to help us. Proportionate to volume, increase in Web documents, etc. Some of that will certainly be incremental to what’s in current plan but won’t knock you off your feet with any changes we’ll make to guidance.

8:55 Mike Learmonth: Any opposition or convincing to Washington? Ballmer: Really are two different issues. We expectto face some opposition from “the competitor” who may not like more competition. We actually think this is where we think us coming together offers more competition, not less. We think we have a good case for how this improves competition. Obviously we’ll be called upon to present that case, but we’ve looked into that extensively.

8:57 Brad Smith: We look forward to moving forward very quickly in DC, Brussels. We expect to start filing process next week.

8:59 Bartz confirms more layoffs, someday: Many Yahoo search employees will be asked to take jobs at Microsoft. There will also be search employees who we’ll ask to help on display side of business. And then, unfortunately, there will be some redundancies, so that’s the third bucket. Transition over the next 2.5 years. Virtually nothing will change until we get regulatory approval (early 2010), 24 months for transition. Yes, there will be redundancies, but it’s in the future. Number? Still in the planning.

9:00 How much does this impact the part that search plays in your service offerings to consumers? Mobile Yahoo services? Businsesses you still compete? Ballmer: The way the deal was constructed, probably the most complex, is to ensure that for our engineers on both sides, we can essentially have the same ability to innovate around and about using search for other things as the other company can. Treat respective users properly with privacy, etc. that they would expect.

9:02 Bartz: Very careful and systematic to make sure how data information flows. Both for privacy and so how both of us can innovate and have good experience.

9:03 Questioner says “IBM” instead of “Microsoft.” Oops.

9:04 Staci Kramer of “Pad Content” introduced. Mobile, she asks? Carol: Bing for mobile not exclusive, as it is on PC. Will start exercising right to do it. Not exclusive; could switch. Ballmer: We don’t know what we don’t know about what investing in mobile.

9:06 What is TAC rate for What assumptions for risks of affiliates? You and Steve spoke in terms of scale for advertisers. What about getting all those 800,000 advertisers already on Google? Combined marketplace? Buying keyword in both environments. Really selling the combined market. Strength of properties for where money actually lands? Affiliates: Have worked with Microsoft to work on affiliates. One system, AdCenter, as opposed to both, really expect that we can provide a much better experience and win them over to bigger marketplace.

9:11 With development of Bing, thought between Microsoft picking up exclusive… Ballmer: Our engineers know Bing, in details, no we haven’t looked at Yahoo’s code. Wanted to make sure we could put together integrated value of expertise and code.

9:14 Another question from USA Today: What kind of innovation from the deal? Ballmer: We have access to two of the sets of technology in this area. Do we think we will have better algorithms for relevance? Yes. And turns out that scale drives knowledge which drives innovation. Even ability to understand customers is enhanced.

9:17 AP question: Why is this deal better than the one that Microsoft had on the table last year? Carol: First of all, I’ve done some exploring of that. Actually more fiction in the market than there is fact. The big difference in the deal was that it was considered more of an upfront payment and a low TAC. Not interesting to us because we’re trying to run a long-term business here. We feel this is a true partnership. We have control this time over Yahoo user interface. And frankly both of us have real skin in the game and real excitement.

9:19 Ballmer: Last year’s deal was concocted by investors, not operators. For Microsoft, this deal is not better, but different. Less upfront, higher TAC. Those things trade off. Operating management had a clear set of principles for what team at Yahoo wanted to do. Given that working with operating management this time, good for shareholders and makes sense for mission of ongoing operating business that is Yahoo.

9:21 Kara Swisher: Execution and speed. Who’s going to be in charge of coordination. Looking back, what pushed this finally through from your perspective? Carol: Execution team will consist of people from both sides. Not that different from when Yahoo went from Overture to Panama. Doesn’t make it any more fun, but had experience in that. Qi Lu has experience from when he was at Yahoo, so a lot of people familiar with how to move. Ballmer: On the sales side, we have less experience. Yahoo leads, has execution responsibility. Flip to engineering side, we have execution responsibility. Will both have participation.

9:24 Ballmer jokes: It’s not like we came in here with a 2-page term sheet. BING!

9:24 What spent time on isn’t distractions… went through operating circumstances. Kara: How do you cut through distraction? Carol: Well sure a partnership is harder. Dating is one thing, but having a partnership is another. We wanted to make sure we were fully committed. (BTW: Haven’t heard any curse words yet.) The good news is we think we have the right organisation. Once we reached point we believed advantageous to both companies, we could move forward.

9:26 Danny Sullivan: Can you explain what will happen to Yahoo news search? Yahoo directory? Is paid inclusion going away? Search is spread out all over the place. Carol: Internal search is some of the innovation we’re looking at doing. That’s btw one of the issues we really needed to work out. Paid inclusion? Going to decide on that later. Still some things to work out. We have full flexibility on what to do inside our site. That’s the important thing. Lot of value in being able to search our properties and to add different search experience. Ballmer: We’re anxious to see Yahoo make full advantage of our search tech in various parts of its network; now Yahoo will figure out over time where that will play.

9:28 Call over.

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