Yahoo (YHOO) has officially announced its search deal with Microsoft (MSFT). The release is published below. The companies will host a conference call at 8:30 a.m. ET; we’ll cover it live.
Yahoo estimates that once the 10-year deal is at full strength, it will provide a $500 million annual benefit to GAAP operating income and capex savings around $200 million. It will also benefit annual operating cash flow of $275 million, Yahoo estimates.
In a first take last night, based on preliminary information, Henry Blodget called the deal a “hideously complicated regulatory nightmare that could end up being a disaster for both companies.”
The companies have already launched a hilariously titled Web site, http://www.choicevalueinnovation.com, to “provide consumers, advertisers and publishers with additional information about the benefits of the agreement.”
More to come…
Microsoft, Yahoo! Change Search Landscape
Global Deal Creates Better Choice for Consumers and Advertisers
SUNNYVALE, Calif. & REDMOND, Wash.–(BUSINESS WIRE)–Yahoo! and Microsoft announced an agreement that will improve the Web search experience for users and advertisers, and deliver sustained innovation to the industry. In simple terms, Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers.
For Web users and advertisers, this deal will accelerate the pace and breadth of innovation by combining both companies’ complementary strengths and search platforms into a market competitor with the scale to fuel sustained development in search and search advertising. Users will find what they care about faster and with more personal relevance. Microsoft’s competitive search platforms will lead to more value for advertisers, better results for Web publishers, and increased innovation and efficiency across the Internet.
Under this agreement, Yahoo! will focus on its core business of providing consumers with great experiences with the world’s favourite online destinations and Web products.
“This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development,” said Yahoo! Chief Executive Officer Carol Bartz. “Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities and mobile experiences.”
Providing a viable alternative to advertisers, this deal will combine Yahoo! and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 per cent of all search. With the addition of Yahoo!’s search volume, Microsoft will achieve the size and scale required to unleash competition and innovation in the market, for consumers as well as advertisers.
Microsoft Chief Executive Officer Steve Ballmer said the agreement will provide Microsoft’s search engine, Bing, the scale necessary to more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results.
“Through this agreement with Yahoo!, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company,” said Ballmer. “Success in search requires both innovation and scale. With our new Bing search platform, we’ve created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo! know there’s so much more that search could be. This agreement gives us the scale and resources to create the future of search.”
“This deal fits the long-term strategic direction of Yahoo! to remain the world’s leading online media company and Carol Bartz has the full and unanimous support of the Yahoo! Board behind this deal,” said Roy Bostock, chairman, Yahoo! Inc. “This is a significant opportunity for us. Microsoft is an industry innovator in search and it is a great opportunity for us to focus our investments in other areas critical to our future.”
The key terms of the agreement are as follows:
- The term of the agreement is 10 years;
- Microsoft will acquire an exclusive 10 year licence to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing Web search platforms;
- Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology;
- Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process;
- Each company will maintain its own separate display advertising business and sales force;
- Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology;
- Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites; Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 per cent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement; and Yahoo! will continue to syndicate its existing search affiliate partnerships.
- Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 per cent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement; and
- Yahoo! will continue to syndicate its existing search affiliate partnerships.
- Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country;
- At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million; and
- The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.
The agreement does not cover each company’s Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies’ businesses. In those areas, the companies will continue to compete vigorously.
The transaction will be subject to regulatory review. The agreement entered into today anticipates that the parties will enter into more detailed definitive agreements prior to closing. Microsoft and Yahoo! expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions. The companies are hopeful that closing can occur in early 2010.
The companies have established a website at http://www.choicevalueinnovation.com to provide consumers, advertisers and publishers with additional information about the benefits of the agreement.
Conference Call – 5:30 a.m. PDT, Wednesday, July 29
Yahoo! and Microsoft will host a conference call with Yahoo! CEO Carol Bartz and Microsoft CEO Steve Ballmer to discuss the agreement at 5:30 a.m. Pacific/8:30 a.m. Eastern Time today. To listen to the call, please dial 1-866-515-2908 in the U.S. and Canada; +1-617-399-5122 international, reservation number: 47968026. A live webcast of the call can be accessed through Yahoo!’s Investor Relations website at http://yhoo.client.shareholder.com/results.cfm. In addition, an archive of the webcast will be available through the same link. An audio replay of the call will be available for two weeks following the conference call by calling 1-888-286-8010 in the U.S. and Canada; +1-617-801-6888 international, reservation number: 91217610.
Non-GAAP Financial Measures
This release refers to operating cash flow (operating income before depreciation, amortization of intangible assets, and stock-based compensation expense, or OCF), which is a non-GAAP financial measure. The most comparable GAAP measure is income from operations. The estimated annual OCF benefit of $275 million included in this press release is the estimated annual benefit in income from operations of $500 million less approximately $225 million of estimated annual savings in depreciation, amortization and stock-based compensation expense.
Supplemental Information Regarding Projected Incremental Impact of Microsoft Search Agreement
Gross profit1 ($150,000 ) Operating expenses2
Income from operations
Depreciation, amortization and stock based compensation expense($225,000
) Operating income before depreciation, amortization, and stock-based compensation expense (or operating cash flow)
1Gross profit impact consists of increased revenue net of Microsoft’s share of Yahoo!’s search revenue. The increased revenue is attributable to the scale resulting from the combination of the Yahoo! and Microsoft search marketplaces.
2Operating expenses impact represents savings from reductions in spending on Yahoo!’s search technology.
Note: All estimates represent the projected annual financial impact of the agreement following its full implementation, which is expected to occur within 24 months of regulatory approval, and are based on Yahoo!’s current levels of revenues and operating expenses. In addition, all projections exclude anticipated reinvestment by Yahoo! in its non-search business. The projections are necessarily based upon a variety of estimates and assumptions which may not be realised and are inherently subject, in addition to the risks identified in the forward-looking statement disclaimer, to business, economic, competitive, industry, regulatory, market and financial uncertainties, many of which are beyond Yahoo!’s control. There can be no assurance that the assumptions made in preparing the projected financial impact will prove accurate. Accordingly, actual results may differ materially from the projected financial impact.
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