Microsoft/Yahoo! Partnership Details Revealed

A filing with the US Securities and Exchange Commission (SEC) has revealed some interesting details about the recently announced Microsoft/Yahoo! search partnership. Perhaps the most surprising revelation is that Microsoft will pay Yahoo! $50 million per year for three years and will hire about 400 Yahoo! employees.

In case you were on the International Space Station last week and missed the news, Microsoft and Yahoo! announced a sweeping Internet search agreement last week in which Microsoft's Bing service will power searches across all Microsoft and Yahoo! web properties. Yahoo!, meanwhile, will be responsible for selling premium ads across the combined network of services.

Looked at from a strategic perspective, Microsoft retains the underlying search platform, gains Yahoo!'s search expertise, and more than triples its market share in what is increasingly seen as a major source of revenue. Yahoo!, meanwhile, drops the hefty R&D requirements around search and can focus on its core business of serving the consumer web.

At the time of the announcement, the companies said that no money was changing hands and that, for all intents and purpose, nothing was being bought and sold. But that news sent Yahoo!'s stock price tumbling because Yahoo! CEO Carol Bartz had previously said that she wouldn't drop Yahoo! Search for anything less than "buckets of money." Although $50 million per year for three years arguably doesn't meet that qualification, it's certainly a bigger payment than the companies had originally suggested. (Which was nothing.)

Other new revelations from the SEC filing include:

  • Beyond the 400 Yahoo! employees that will move to Microsoft as part of the agreement, Microsoft will hire an additional 150 Yahoo! employees to help with the technology transition. All Yahoo! employees hired by Microsoft will receive "market-competitive compensation packages."
  • Yahoo! can use Microsoft's mapping and mobile services, if desired.
  • The companies have agreed to a "limited, nonexclusive" patent cross-licensing deal.
  • Yahoo! can terminate the partnership if the average revenue per search on Microsoft and Yahoo! web sites drops a certain percentage below the average revenue per search on market-leader Google's sites. Although this percentage isn't revealed, Microsoft last week unwittingly posted information stating that it believes Google makes 7 cents in ad revenue for each search, compared with 4.3 cents for Yahoo! and 3.9 cents for Microsoft.
  • If Microsoft decides to exit the Internet search business and sell Bing, Yahoo! can terminate the partnership. It also gets right of first refusal and right of last offer for the business should it want to purchase Bing for itself.
  • Five years into the 10-year agreement, Microsoft can opt out of using Yahoo!'s sales force for premium ads exclusively. If Microsoft does so, Yahoo!'s take from ads sold on its own sites goes up from 88 percent to 93 percent. If Microsoft does not do so, Yahoo!'s take from ads sold on its own sites goes up from 88 percent to 90 percent at the five-year mark.
  • The two companies have agreed to finalize the partnership by October 27. If that date can't be met, an arbitrator will settle any differences. If the deal isn't finalized by July 29, 2010, the companies can mutually agree to terminate the agreement. Yahoo! also has the exclusive right to extend that last date by six months, if desired.
  • Microsoft will ensure that the partnership meets any antitrust requirements around the globe.
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