Here goes nothing: After rebuffing Microsoft’s $44.6 billion offer, Yahoo is accepting a helping hand from Google, via a 10-year, non-exclusive search advertising deal.
The plan: Yahoo will be able to run Google ads on its U.S. and Canadian search results — where and when it wants to — and will continue to sell its own ads via Panama. Yahoo estimates the deal could generate $800 million in annual revenue and $250-450 million in incremental operating cash flow — but little to no cost savings.
What Yahoo’s not doing: Entirely outsourcing search to Google or getting a huge, up-front check. What it is doing, according to president Sue Decker: Using Google ads where they perform better than Yahoo’s, like “long-tail” search queries, and keeping its own ads on more mainstream queries, where it thinks it can do better. In addition, Yahoo could end up helping Google with display ads, president Sue Decker said on a conference call.
Yahoo and Google say they won’t need regulatory approval for the deal before starting it, but the companies say they’ll voluntarily wait three and a half months before beginning, while the Department of Justice looks it over.
Also part of the deal: Yahoo and Google will make their instant messaging platforms interoperable.
LIVE conference call notes:
Jerry: Going over Microsoft (MSFT) announcement. Board meeting where MSFT said it didn’t want all of Yahoo, even at price range previously suggested.
Convergence between search and display key to success. How will it work? Commercial agreement that enables Yahoo to post Google ads alongside search results. Will continue with Panama. Agreement is 10 years long with a 4-year initial term, with two 3-year renewals at Yahoo’s option. U.S. and Canada only.
$250-$450 million in incremental operating cash flow in first 12 months. “New and innovative steps” to generate value.
Sue: We’re really excited about the potential of what we’re announcing today! Hallmark is flexibility: Full control over all of YHOO’s business. Yahoo (YHOO) chooes whether to run ads and how much. Will work well with tail queries; will keep YHOO for common searches, etc. Advertisers pay Google (GOOG) directly; Google will pay YHOO TAC for click through revenue. Advertisers will continue to pay YHOO directly for Panama. Improve access to paid search universe that leverage strengths, etc.
First release of AMP will be active with initial pilot publishers next week. Broader rollout in Q3. Agreement includes interoperability between Yahoo and Google’s instant messaging apps.
Jerry: Directly addressing one key element in YHOO’s strategy to success in search and display. Will keep looking at alternatives. Look forward to sharing accel. progress with you as we move forward.
Merrill: GOOG has market share leadership. Will advertisers still want to buy YHOO when they can buy GOOG and potentially get on YHOO? Any interest in your part on serving content ads on GOOG pages?
Sue: YHOO monetizes competitively with query ads, but not in the tail, because of GOOG’s scale. Flexibility of deal lets us get the best of both worlds. Can optimise every single day. Will keep marketplace alive and vibrant. Components of this deal where we’ll be working on other elements of value, and one might be helping Google with display ads.
Lehman: What % of search queries do you expect to run third party ads on?
Sue: Important to emphasise that $800 million opportunity is relevant to just queries in which we see opportunity. Will continue to monetise head on our own. Don’t expect many cost savings; some variable serving costs, but expect to maintain expense base.
Q: Not disclosing TAC split. favourable to both?
Sue: “Competitive” TAC split. Both parties felt it was an attractive opportunity.
UBS: Will partner sites just go straight to GOOG? Minimum guarantees?
Sue: Publisher partners are included in this agreement. Our choice and theirs whether they’d like to avail themselves into this opportunity. Deal does not extend to new partners that might join publisher network, which we’ll service with Panama. Can’t comment specifically on financial terms, in terms of guarantees.
DB: Trying to control more display, but in search, doesn’t this go against must-buy strategy? Or is this a different advertiser set? $800 million annual or first four years?
Sue: $800 million is annual, on the portion of queries we think there’s an oppty; not on all of query base, based on current monetization, not future. In terms of must buy, we think fits in to AMP strategy. We are open to third party networks in display the way we’ll be in search with Google. Will assure best monetization rates to publishers, best ads to consumers.
Q: Allocating 3.5 months to regulatory. What’s biggest hurdle?
Jerry: Commercial agreement, no regulatory really, but voluntarily told DOJ they could look at the deal. In advertising, the way we do it between search and display. Gain the right to use Google to back-fill some of our advertising, but we’re in full control.
Thomas Weisel: Incremental operating margin/profitability you listed? How much in the way of TAC splits… what rev. canibalizing? How long will it take you to get fully optimised?
Jerry and Sue: We don’t understand your questions!
Jerry: Ramp toward full implementation… not going to be talking about that. Want to leverage relationship to build long-term competitiveness. As we go through learning and understanding how we can create marketplaces, we’ll be understanding opportunity. Lots of options for us.
Sue: When we contemplate incremental cash flow, contemplating how we might learn and implement in various verticals, types of queries where Google is particularly strong where we don’t have best scale. Long-term objective of convergence!
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