SAN JOSE, Calif. — Just two years ago, Yahoo spent $79 million to rebuff a hostile takeover from Microsoft and preserve its independence. Now, a big part of Yahoo's future prosperity depends on how well it can join arms with Microsoft on a high-risk, high-reward technical project.
Yahoo and Microsoft are racing to meet a fall deadline for launching their joint venture to collaborate on Internet searches, an effort by the former rivals to try to narrow the gap with their much stronger, common foe: Google.
The effort — including the retraining of hundreds of Yahoo sales people to sell ads for both companies — needs to be done by mid-October if the two companies hope to have the show running before the start of the holiday season, the critical make-or-break period for advertisers and publishers.
At stake in the joint venture, Yahoo executives say, is the company's ability to become an innovative force in search again — something Yahoo acknowledges it can no longer afford without its partnership with Microsoft's Bing search engine. The 10-year partnership has Bing providing the underlying results of Yahoo searches, while Yahoo retains control for how those results are displayed.
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But outside observers say more than just Yahoo's reputation in search is at stake. Considering the revenue and traffic represented by Yahoo's 3.1 billion U.S. monthly search queries, the search partnership represents a critical gamble to grab a bigger piece of the search revenue pie. During the first half of 2010 compared with last year, Yahoo's search ad revenue declined by 11 percent, or $84 million, to $674 million, even as the economy improved.
"Really, there is a tremendous amount at stake here, for both players," said Laxmi Poruri, an analyst with Primary Global Research. "There are search engine advertisers out there who are eager for this. They want to spend more money on Yahoo and Bing. The problem is these guys (individually) aren't getting enough traffic for them."
Both Microsoft and Yahoo executives say the switch-over is going as well as could be expected, and Yahoo says that all of its search traffic, apart from paid search, could be powered by Bing as soon as the end of August.
Under the collaboration, Yahoo gets 88 percent of the revenue from searches done from Yahoo sites over the first five years, while saving the heavy costs of the computer infrastructure needed to crawl, index and rank the Internet. Microsoft gets the still-significant search traffic flowing through Yahoo. That is valuable, because the more queries a search engine processes, the more relevant its answers, and the more extensive variety of keywords it can sell to advertisers.
Microsoft's costs for Bing have been huge. Its online services division, which includes Bing and MSN, reported a $2.36 billion loss in fiscal 2010. Meanwhile, Bing gained 4.7 percentage points in market share in its first year, to 12.7 percent of U.S. searches, according to comScore.
Yahoo says its long-term ability to build innovative search products hinges on the collaboration.
"It's not about the transition," said Mark Morrissey, the Yahoo senior vice president in charge of the company's transition team. "It's about the future of search, and where we want to go."