Microsoft-Yahoo Deal Likely This Week

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NEW YORK ( — Yahoo is close to making Microsoft’s Bing its search provider.

The deal, which would make Yahoo a more credible competitor to Google, is likely to be announced this week, and seems likely to be based on a revenue share, not on a big fat check upfront, as some at Yahoo had hoped.

Yahoo’s request for an upfront payment (it is said to have asked for several hundred million), in addition to revenue guarantees that would amount to billions over the course of the deal, caused a breakdown last week in the on-again-off-again talks. But they were revived late on Thursday, according to executives with knowledge of the situation.

 Ad Age Digital  DigitalNext  MediaWorks Execs in Redmond never conceived of the deal as an upfront purchase of Yahoo’s search traffic but as a deal in which Yahoo would be compensated from a share of revenue from the sale of search ads. Yahoo would be allowed to sell search ads on as well as its own site, giving it more search inventory to sell and making it a bigger player in the search sales front. It would also immediately be able to save millions by not having to maintain its own search infrastructure.

The latest terms of the deal underscore Microsoft’s devotion to developing and owning technology vs. selling media. The deal won’t make it a bigger seller of online advertising but it would allow it to eliminate a search-technology competitor in Yahoo and consolidate roughly 30% of the search marketplace on its own platform — a large enough share, CEO Steve Ballmer seems to believe, to dent Google’s dominance.

Splitting revenue
In addition to the upfront payment, negotiations grew tense last week over the amount of revenue each side would derive from search-ad clicks. 

Yahoo wants more revenue from searches that originate on Yahoo and lead to a purchase, or for clicks on ads after a search for a brand name like “Nike.” Assigning value to different clicks has proven complex and contentious, and will ultimately determine how much both sides ultimately earn from working together.

Other sticking points included the amount of data Yahoo would get, as it uses search behaviour as an ingredient in its behavioural targeting, and whether Bing gets any branding on Yahoo has at times given “powered by” branding to other search engines, including Inktomi, AltaVista and, from 2000 to 2004, Google. In fact, many credit Yahoo with giving Google the credibility boost it needed to become the giant it is today.

Some think it’s possible that Microsoft will give up potential Bing branding if Yahoo will give up demands for an upfront payment and get the deal done. The risk in that approach, from Microsoft’s point of view, is that Yahoo would still have a strong display offering coupled with a bigger, better search sales offering, potentially hampering Microsoft’s own sales efforts.

It’s not clear whether the search deal would have advertisers buying ads via Yahoo’s Panama or Microsoft’s AdCenter platform, but buyers would prefer the latter. AdCenter has more features than Panama, which has languished without investment for about a year, execs close to Yahoo told Ad Age. Many say AdCenter could be Google AdWords’ equal, but it needs more search volume, which a deal with Yahoo would help to provide.

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