June 12, 2008
Yahoo announced a nonexclusive partnership Thursday under which rival Google will supply it with some Web search ads, a move that could increase Yahoo Web search revenue but that also gives Google even more power in the market.
By Stephen Shankland & Ina Fried
Yahoo expects the deal, which was expected, to raise revenue by $800 million in its first year and to provide an extra $250 million to $450 million in incremental operating cash flow. That's a major potential boost, given that Yahoo reported revenue of $1.53 billion in its most recent quarter, after ad commissions are subtracted.
"We see this as a good, open, flexible deal and (one that) helps Yahoo be strengthened as a good longer-term competitor," Chief Executive Jerry Yang said in a conference call Thursday.
Some saw more urgent motives at work, though.
"They're using this as a tool to boost short-term cash flow," said Canaccord Adams analyst Colin Gillis. "They're trying to keep the wolves at bay."
Yahoo expects the revenue to help the company invest in its dual-pronged Web advertising strategy that's designed to offer Web advertisers an easy ability to buy text ads on Web search results and to buy graphical "display" ads elsewhere on Yahoo's considerable Internet properties.
"This agreement provides a source of funds to both deliver financial value to stockholders from Web search monetization and to invest in our broader strategy to transform display Web advertising and advance our starting-point objectives with users," Yahoo President Sue Decker said in a statement. "It enhances competition by promoting our ability to compete in the marketplace where we are especially well-positioned: in the convergence of Web search and display."
Shareholders looking for a quick payback should be prepared for a wait, though. The companies are voluntarily delaying implementation of the partnership for up to three and a half months to let the Justice Department review the deal, Yahoo said, a nod to antitrust concerns raised about the deal.
"We believe, given that it's a commercial agreement, there's not formal regulatory approval" required, Yang said. "We agreed with the Department of Justice on a voluntary basis to have them review this deal."
One U.S. senator, meanwhile, urged scrutiny.
"We will closely examine the joint venture between Google and Yahoo announced today," Sen. Herb Kohl, Democratic chairman of the Senate Antitrust Subcommittee, said in a statement. "This collaboration between two technology giants and direct competitors for Web advertising and Web search services raises important competition concerns. The consequences for Web advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."
While Yahoo evidently expects a stronger future out of the deal, a tight partnership is a double-edged sword. In the long run, Yahoo likely will find its Google partnership hard to dial back even if it wants to: "The reality is it's going to be hard to unhook from the Google cash flow," Gillis said.
Under the deal, Yahoo will select the Web search terms for which Google will supply ads, the companies said. The ads will be displayed in the United States and Canada, and Decker took pains to say how Yahoo controls which Google results are displayed and when.
Yahoo's Web search-ad engine, Panama, is competitive with Google's for many popular queries, but Yahoo plans to use Google with less common Web searches, Decker said. "Yahoo monetizes very competitively with Google for query ads but is not as competitive in the tail," she said, referring to the long statistical tail consisting of a large number of infrequent Web searches.
The partnership also extends beyond Web advertising. The two companies will make their instant-messaging services interoperable, lowering a barrier that separated two communities of users at the sites.
The agreement allows either party to cancel under circumstances such as an acquisition or other "change in control." However, Yahoo must pay $250 million, minus the revenue Google earned, if it's terminated within 24 months.
The partnership is a 10-year deal, a four-year initial period and two options for Yahoo to renew for three years, Decker said.
Google and Yahoo declared a limited two-week Web search-ad deal in April a success, but even the limited partnership raised antitrust hackles at Microsoft (MSFT).
Google is the leading Web search engine by a wide margin. Google increased its share of the U.S. Web search market to 68.29% in May at the expense of Yahoo and MFST, according to Hitwise.
Having more Web searches means more virtual real estate for ads and therefore a more desirable place for Web advertisers to bid for placement. Google also has worked aggressively to try to deliver only ads that are relevant to particular Web search queries, a move geared to increase the revenue generated per click.
The partnership idea came to light during MFST's attempt to acquire Yahoo, which put more pressure on the Internet company to improve its financial results. Both a full-on acquisition and a narrower partnership appear to be no longer an option, though.
Yahoo announced Thursday that it and MFST couldn't close a deal and that MFST wasn't interested in buying Yahoo outright even at the earlier price of $33 per share. Yahoo's shares dropped more than 10%, or $2.63, to $23.52.
MFST quickly raised antitrust concerns when the Web search-ad test began, saying the move would reinforce Google's dominance in the Web search-ad business. Google has countered that Web search ads are only a narrow part of the online ad market, and that Yahoo is the strongest company when it comes to the graphical "display" ads.
Google spoke highly of the deal on Thursday, too, though it didn't offer any projections of its financial effects.
"This commercial agreement provides Yahoo with the opportunity to deliver more relevant ads to users and provide Web advertisers and publishers with better Web advertising technology to help them succeed in their own businesses," said Google CEO Eric Schmidt in a statement. "This agreement will preserve the competitive and dynamic Web advertising space."
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