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New Microsoft deal gives Yahoo more flexibility on advertising

April 16, 2015 05:17 PM
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(Bloomberg)—Microsoft Corp. and Yahoo Inc. revamped their search agreement, giving the web portal more freedom over how it makes money from advertising under CEO Marissa Mayer.

Yahoo no longer will have to use Microsoft to serve all the ads on desktop searches, under the agreement announced Thursday. While Yahoo already had that flexibility with mobile search, the new deal adds the leeway for a minority of desktop ads.

Microsoft will now handle the relationships with advertisers for its Bing search service, instead of Yahoo.

Yahoo, which struck a 10-year deal in 2009, renegotiated the terms as Mayer seeks new ways to drive revenue growth amid a turnaround effort. The company has struggled to increase sales under her leadership. Fourth-quarter revenue, excluding what’s shared with partner websites, fell 1.8% to $1.18 billion. The search agreement contributed 35% to sales last year, Yahoo said in a regulatory filing.

“We are encouraged by the increased flexibility for Yahoo,” analysts at JPMorgan Chase & Co. wrote Thursday in a note. “Yahoo is now able to provide its own search results and also to partner with others.”

The deal may even allow Yahoo to work with Google Inc., the market leader in search, to provide advertising on the service, boosting returns for promotions, the analysts added.

Bargaining position

The agreement alters an alliance some had expected Yahoo might try to exit. If Yahoo had a stronger negotiating position, it may have led to a more notable update, said Brian Wieser, an analyst at Pivotal Research Group LLC.

The amended agreement highlights the two companies’ limited success in competing with Google in search. Google had 64% of the U.S. desktop search market in March, according to ComScore. Microsoft, which is based in Redmond, Washington, had 20%, while Sunnyvale, Calif.-based Yahoo had 13%.

“Scale matters in search,” Wieser said. “And yet diversity of approaches may be necessary to find alternative ways to effectively compete.”

The agreement leaves unchanged an arrangement in which Microsoft pays Yahoo a percentage of Bing ad revenue delivered from Yahoo searches.

Yahoo will continue to run the sales force for its Gemini ads platform. Integrating the sales teams with those responsible for engineering will allow both companies to service advertisers more effectively, the companies said.

Partnership options

Satya Nadella, Microsoft’s CEO, in the statement praised the deal as a sign of a strong partnership. Mayer said the agreement gives her new options.

“This renewed agreement opens up significant opportunities in our partnership that I’m very excited to explore” she said.

Yahoo shares were little changed at $45.78 at the close in New York. Microsoft shares were down less than 1% at $42.16.

Yahoo’s shares fell 12% on the day the companies reached their 2009 deal after the arrangement didn’t provide for an upfront payment from Microsoft.

“Yahoo still lacks its own search technology and has seen dropping search share,” Danny Sullivan, founding editor of Marketing Land and Search Engine Land, said in an email. “I’d say this lets them make more with less and perhaps buys more time for the company to get weaned off search revenues.”

 

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