Microsoft and Yahoo! Plan Search Partnership with Microsoft’s Bing Replacing Yahoo!’s Search

| Jul 30 2009 | Digital Home - U.S. | Competitive Intelligence Report

| Analyst: Larry Hettick

Current Perspective: Slightly Positive
Vendor Importance: High
Market Impact: Low

Event Summary

July 29, 2009 – Microsoft and Yahoo! have agreed that Yahoo! will use Microsoft’s new Bing search engine for ten years, if the deal meets regulatory approval. In exchange, Microsoft will pay Yahoo 88 % of associated ad revenues for target acquisition costs (TAC) and Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers.

Analytical Summary

• Current Perspective: Slightly positive on Microsoft’s agreement to replace Yahoo!’s current search capability with its revamped search engine, Bing, because it gives Microsoft a larger scale to compete more effectively with Google’s search capability. Slightly negative on Yahoo!’s abandoning its independent search engine development in favor of using Bing as its new search engine. By itself, Yahoo! is second only to Google as the search engine market leader, and although Bing may have some user advantages over Yahoo!’s search capabilities, Bing has only been on the market since May 2009, and must still prove itself as a superior product over Google.

• Vendor Importance: High to Microsoft, because the Yahoo! partnership could move Microsoft’s Bing from a distant third-place search engine to 25% or higher market share against Google. Very high to Yahoo! since the deal means Yahoo! has essentially abandoned its own search engine development, having spent over $2 billion trying to make it a successful part of the Yahoo! product portfolio.

• Market Impact: Low on the market, unless the deal gets regulatory approvals from U.S. and European authorities. Even though Microsoft and Yahoo! are search engine underdogs compared to Google, Microsoft has had some difficulty with anti-trust regulators in the past, so regulatory approval isn’t automatic. Microsoft and Yahoo! are hopeful that the deal will be consummated by early 2010, so the earliest market impact won’t likely happen for at least nine to 12 months given the amount of platform integration required.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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Recommended Competitor Actions

• Google can launch its own regulatory and legal counter-offensive, playing up Microsoft’s past market dominances and playing on fears that a combined Microsoft-Yahoo! search engine partnership would be bad for consumers because of fewer choices.

• AOL can try to thwart the partnership, suggesting that a combined Microsoft and Yahoo! will reduce the number of players into a duopoly of Microsoft vs. Google. If approval appears likely, AOL should consider alternative revenue sources, as it will become an even smaller fish in a big pond as it competes for advertising revenues.

• MySpace can continue to pursue ad revenues as Microsoft and Yahoo! are distracted by potential partnership. Since MySpace is owned by News Corp., and it has search engine capabilities provided by Google, it should remain unconcerned about its own long-term position.

• Facebook, which sold a 1.6% stake in the company to Microsoft in 2007, should examine how it will compete for advertising dollars in light of combined Microsoft and Yahoo! search partnership, deciding if it should be a competitor or a partner for page views with the combined entity.

Recommended End User / Customer Actions

• Consumers should not be alarmed in the near term, since this proposed partnership is likely a year from being noticed on Yahoo! and Microsoft Web sites. In the long term and if the deal is approved, customers should demand better search services and an improved portal from the both companies.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Digital Home - U.S. | More information

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