Aug 302010

By Mike Swift


Just two years ago, Yahoo Inc. spent $79 million to rebuff a hostile takeover from Microsoft Corp. 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.

Last week , Yahoo and Microsoft launched part of the North American stage of a joint venture to collaborate on Internet search, an effort by the former rivals to try to narrow the gap with their much stronger foe: Google Inc.

The effort — including the retraining of hundreds of Yahoo salespeople to sell ads for both companies, and a conga line of about 400 engineers who are relocating from Yahoo to Microsoft offices in Silicon Valley; Bangalore, India; Burbank, Calif.; and Redmond, Wash. — needs to be complete by mid-October if the two companies hope to have the show up and running before the start of the holiday season, the crucial make-or-break period for advertisers and publishers.

Although both companies say last week’s transition was a milestone, there is a vast amount of work left, including implementing the advertising side of the transition in the U.S. and Canada.

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, with Yahoo retaining control of how those results are displayed.

But outside observers say more than just Yahoo’s reputation in search is at stake. Considering the revenue and traffic (Get 10000 free hits) represented by Yahoo’s 3.1 billion U.S. monthly search queries, the search partnership represents a pivotal gamble by new CEO Carol Bartz to grab a bigger piece of the search revenue pie.

During the first half of 2010, Yahoo’s search ad revenue decreased by 11 percent compared with last year, to $674 million, even as the economy improved.

Bartz and Microsoft CEO Steve Ballmer have made the search transition a top priority for both companies, executives say.

“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 (Get 10000 free hits) for them.”

But Poruri said Yahoo also is under pressure in the long run to continue to generate search traffic (Get 10000 free hits) for Bing. “If the technology is a disappointment or the traffic (Get 10000 free hits) acquisition is a disappointment, then Microsoft will go somewhere else to get that traffic (Get 10000 free hits),” Poruri said.

Both Microsoft and Yahoo executives say the switch has gone as well as could be expected. Still, Mark Morrissey , the Yahoo senior vice president in charge of the company’s transition team, said engineers sometimes pulled 48- to 72-hour shifts to hit key milestones.

“I can tell you, far and away, this is the most complex logistical and technical thing I have ever been a part of,” said Morrissey, who also handled Yahoo’s switch to new systems for its paid search ads and display ads.

“All our day jobs are really that at this point,” said Satya Nadella, senior vice president of Microsoft’s Online Services Division.

Search for strength in numbers

The Yahoo-Microsoft alliance represents an unprecedented effort by two former competitors to join forces. It has become increasingly necessary because of Google’s dominance. Google now provides about two-thirds of U.S. Internet searches, and an even higher share in many other countries.

Under the collaboration, Yahoo receives 88 percent of the revenue from searches done on Yahoo sites in the first five years, while saving the heavy costs of the computer infrastructure needed to crawl, index and rank the Internet. Microsoft receives the still-significant search traffic (Get 10000 free hits) 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 $2.4 billion loss in fiscal year 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 marketing research company ComScore.

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