Microsoft and Yahoo agreed on Wednesday to an online alliance that could create a more formidable rival to Google in the search business. The deal will give Microsoft a 10-year licence to integrate Yahoo’s search technology into its existing search platforms, while Yahoo will become the “relationship sales force” for advertisers for both companies.

This post is a live blog of a conference call with Carol Bartz and Steve Ballmer, the chief executives of Yahoo and Microsoft.

14.30 BST: That’s it. There wasn’t a lot of warmth between Ballmer and Bartz evident on the call. He deferred to her and let her do most of the talking. The length of the deal, the scale of Microsoft’s investment, the high payments to Yahoo, and the sheer complexity of the technology integration certainly make it sound like they’re tied at the hip from now on, so let’s hope they’ve really hashed out all their differences already.

14.29 BST: Bartz: There are still details to work out, for instance how to handle news search, paid inclusion and other more specialised areas. “We have full flexibility what to do inside our site.”

14.27 BST: (Partnerships often don’t work, so how do you make sure you execute on the plan?) Ballmer: There are more than 100 pages of operating details that have been worked out, this was not just a two-page term sheet.

14.25 BST: (Why now?) Bartz: After a lot of talking, the two sides got comfortable with each other. “It’s like the proverbial snowball down a hill, when it gained momentum people said yes, this is going to work.”

14.23 BST: Ballmer’s take on the same question: This time around, operating managers got to negotiate it, it wasn’t just done with a view to the investor benefits (so was all that money spent on investment bankers a waste, then?)

14.21 BST: (Why this deal, not the one Yahoo offered last year?) Bartz: The sticking point was the high upfront payment from Microsoft and low on-going TAC rate it would have paid.  She adds: “That was not interesting to us because we are really trying to run a long-term business here… We have control this time over the Yahoo user interface… Frankly both of us have real skin in the game.”

14.15 BST: It sounds like integrating these search engine and advertising platforms is going to give someone a major headache: Bartz says Yahoo’s advertising platform is already used by Microsoft in many markets outside the US so this will continue. The two CEOs are tying themselves in knots trying to explain how it will all work.

14.12 BST: (Will this be enough to get some of Google’s 800,000 advertisers to try out the Microsoft/Yahoo platform?) Bartz: Switching to a single platform - Microsoft’s AdCenter - and dropping Yahoo’s Panama platform will make it more efficient for smaller advertisers in particular.

14.09 BST: Ballmer: Microsoft doesn’t pay Yahoo any TAC rate for adverts sold on Bing: “It’s a combined marketplace, you’re buying the keyword in both environments.”

14.04 BST: Ballmer: The most complicated part of negotiating the deal was working out how to handle the flow of information [about customer behaviour] so that both companies can continue to innovate in search. Also, ensuring that each customer’s information stays private took a lot of work.

14.02 BST: Bartz: Some Yahoo search employees will be asked to join Microsoft. “Yes, there will be some redundancies” - but no numbers at this stage. Also, the financial projections for Yahoo (see below) are for three years out, after the deal has bedded down.

13.59 BST:(Will this run into anti-trust problems?) Ballmer: We expect Google to oppose this in Washington, but we think it helps competition. Brad Smith, Microsoft’s general counsel, adds: Google has 78 per cent of the market worldwide for paid search, it would be unusual for a company with that sort of dominance to try to stop the number two and three players getting together.

13.53 BST: Ballmer: We paid a high TAC rate, there’s no doubt about it. Also, investment in Microsoft’s systems to make this deal work will be “a few hundred million” dollars in the early years. But the long run benefits will make up for it.

13.53 BST: (Why didn’t Yahoo get an upfront payment, particularly since Bartz said she wanted “boatloads of money” from a deal?) Yahoo can make it up with a higher TAC rate (the traffic acquisition costs Microsoft pays for the search traffic. Also, she says she used the “boatloads of money” phrase a few weeks ago because it was “easier for you guys to understand” than talking about value (is that any way to talk to Wall Street’s finest analysts??)

13.48 BST: (How do Yahoo and Microsoft compare in revenue per search?) Steve Ballmer: Microsoft and Yahoo are sort of close, but behind Google. Some of that gap is technology, and some is scale. How the deal helps: “More relevance, more places to serve up ads, more bids. I’m not expecting it to have negative consequences for our p&l but it’s a risk I’m prepared to take.”

13.47 BST: (Why no display component?) Bartz: We wanted to keep this as straightforward as possible.

13.46 BST: Straight to questions - very business-like this morning

13.42 BST: Bartz: Microsoft gets an exclusive ten-year licence. Yahoo to sell adds. Microsoft will pay Yahoo 88 per cent [this is a correction: we earlier incorrectly reported it was 98 per cent] of the revenue from search ads for the first five years, with revenue guarantees for the first 18 months in each country in which it is implemented. The deal will add $500m a year to Yahoo’s operating profits.

13.40 BST: When people search with us it will still be prominently Yahoo branded. At the bottom of the page it will say: Powered by Bing.

Bartz: This is a great day for Yahoo. Game changer - I’m glad to finally be able to talk to you about it.

13.34pm BST: Call just getting going. Disclaimers ahoy!

13.29pm BST: Waiting for the conference call to begin.

Tags: microsoft, search, Yahoo

July 29, 2009 1:31pm in Digital media, Internet | Comment