Toan Tran: Hello, I'm Toan Tran, associate director of the technology team at Morningstar. I'm here today with Larry Witt to talk about the Microsoft-Yahoo search partnership that was announced this morning.
From Microsoft's perspective, we believe it's a pretty good deal. It's a much better deal than Microsoft buying all of Yahoo, and it helps Microsoft gain scale in search and search advertising. It represents likely the company's best and last hope in trying to make a dent in Google's dominance.
For Yahoo, though, this is a much more material deal. Larry, can you talk about some of the benefits of this deal for Yahoo?Read Full Transcript
Larry Witt: Sure, absolutely. For Yahoo, it's going to allow the company to scale back on its operating expenses. They no longer have to support a massive infrastructure related to the search business. There was a lot of cutback in regards to data and servers, as well as spending on scores of engineers to really support that business.
What this is going to do, basically they're going to outsource all of that to Microsoft. So they're going to be able to save quite a bit of savings, while only giving up a little bit of the revenue. There will be a revenue-share deal where Microsoft is essentially collecting all of the money but then paying out a large percentage of that to Yahoo. Ultimately, we think the economics of this deal will benefit Yahoo's bottom line.
Tran: Did you expect Yahoo to get some sort of upfront payment from Microsoft? Have there been rumors, perhaps?
Witt: There were rumors over the last year or so, as we've both followed the progression of this deal, that they were looking for a big upfront payment. What Carol Bartz said today, the CEO of Yahoo, on the call, was that in prior deals there was a large upfront payment, but the actual revenue share was going to be a lot lower for Yahoo. They claim they would rather have a higher revenue share deal in the long run because they're thinking of this as more of a long-term partnership.
We don't necessarily buy that. We think they would have loved to have $1 billion or $2 billion upfront. But in the long run, we do think that it is going to be economically beneficial to Yahoo
Tran: As part of the deal, Microsoft, as you mentioned, will be responsible for all the backend technology, but Yahoo will be responsible for the sales of all this search advertising. Do you think that poses a problem in terms of execution and integrating the two companies?
Witt: Yeah, absolutely. We think it's going to potentially be a big headache for both companies, and potentially for marketers as well. If things don't go very smoothly, and if requests aren't being fulfilled, and if their ads aren't showing up on the sites for some reason, some of them may potentially say, "You know what, despite the improved market share and the alternative to Google, it's just not running smoothly. I'm just going to stick with Google," and just go away completely.
And also, because you have two different companies running two different pieces of the business, there is that potential what if something goes wrong, and Yahoo blames Microsoft, Microsoft blames Yahoo. So there's definitely some pitfalls to watch out for over the next couple of years.
Tran: The search deal gives the combined Microsoft and Yahoo about 28% share of the search market. This obviously is a distant second to Google's dominant 65% share. How do you think this will change, if at all, the competitive dynamics of the search industry?
Witt: I think it's important first of all to break it up into the short run and the long run. In the short run, there's probably going to be some marketers who have avoided Yahoo and Microsoft to this point just because by themselves the market share is just too low. So now, even though it's still a distant second, it's a decent market share, almost at 30% of market share of queries here in the United States. So some of them may be more willing to at least try this platform up front.
And so what happens is we get more marketers on the platform. You're going to get better ad coverage, you're going to have more keywords that actually show ads. And also with more marketers, each keyword may have multiple bidders, which bids up the price.
So ultimately you'll probably have higher revenues per search, which is great for both companies. The problem we see in the long run, if Google keeps taking market share of search queries and users just prefer that search engine, then that 30% or 28% market share as of today could continue to dwindle. So we think in the long run, maybe this share of search dollars continues to dwindle as well.
Tran: Bottom line, does this affect your fair value estimate for Yahoo?
Witt: Because of the cost savings we may increase our fair value by a dollar or two, but it would not be a significant increase at this point.
Tran: Thank you very much, Larry.
Witt: Thank you.
Tran: I'm Toan Tran, thank you for watching.