NEW YORK (AdAge.com) -- Yahoo is close to making Microsoft's Bing its search provider.
The deal, which would make Microsoft a more credible competitor to Google, is likely to be announced this week, and seems likely to be based on a revenue share, not on a big fat check upfront, as some at Yahoo had hoped.
Yahoo's request for an upfront payment (it is said to have asked for several hundred million), in addition to revenue guarantees that would amount to billions over the course of the deal, caused a breakdown last week in the on-again-off-again talks. But they were revived late on Thursday, according to executives with knowledge of the situation.
Execs in Redmond never conceived of the deal as an upfront purchase of Yahoo's search traffic but as a deal in which Yahoo would be compensated from a share of revenue from the sale of search ads. Yahoo would be allowed to sell search ads on Bing.com as well as its own site, giving it more search inventory to sell and making it a bigger player in the search sales front. It would also immediately be able to save millions by not having to maintain its own search infrastructure.
The latest terms of the deal underscore Microsoft's devotion to developing and owning technology vs. selling media. The deal won't make it a bigger seller of online advertising but it would allow it to eliminate a search-technology competitor in Yahoo and consolidate roughly 30% of the search marketplace on its own platform -- a large enough share, CEO Steve Ballmer seems to believe, to dent Google's dominance.
In addition to the upfront payment, negotiations grew tense last week over the amount of revenue each side would derive from search-ad clicks.
Yahoo wants more revenue from searches that originate on Yahoo and lead to a purchase, or for clicks on ads after a search for a brand name like "Nike." Assigning value to different clicks has proven complex and contentious, and will ultimately determine how much both sides ultimately earn from working together.
Other sticking points included the amount of data Yahoo would get, as it uses search behavior as an ingredient in its behavioral targeting, and whether Bing gets any branding on Yahoo.com. Yahoo has at times given "powered by" branding to other search engines, including Inktomi, AltaVista and, from 2000 to 2004, Google. In fact, many credit Yahoo with giving Google the credibility boost it needed to become the giant it is today.
Some think it's possible that Microsoft will give up potential Bing branding if Yahoo will give up demands for an upfront payment and get the deal done. The risk in that approach, from Microsoft's point of view, is that Yahoo would still have a strong display offering coupled with a bigger, better search sales offering, potentially hampering Microsoft's own sales efforts.
It's not clear whether the search deal would have advertisers buying ads via Yahoo's Panama or Microsoft's AdCenter platform, but buyers would prefer the latter. AdCenter has more features than Panama, which has languished without investment for about a year, execs close to Yahoo told Ad Age. Many say AdCenter could be Google AdWords' equal, but it needs more search volume, which a deal with Yahoo would help to provide.
Yahoo may have no choice but to seek an alternative for its search business. Mr. Ballmer told a group of businesspeople at a luncheon in Chicago that he would be willing to spend 5% to 10% of Microsoft's operating income on search for up to five years. That's a lot of money -- between $5.5 billion and $11 billion.
"There is no way [Yahoo] can compete with that," said Tim Cadogan, CEO of ad-serving firm OpenX and former senior-VP of global advertising for Yahoo. "As Bing grows, the first place Bing takes share from is not Google but the other guys. So Yahoo is going to lose share unless they have something radical planned."
Early numbers indicate that Bing.com is starting to hurt Yahoo Search. In June, the last full month measured and the first full month after the launch of Bing.com, Microsoft's search share moved up 0.4% to 8.4%, while Yahoo moved down to 19.6% from 20.1%.
In addition, growing search share is increasingly dependent on striking distribution deals with computer manufacturers, mobile networks, and internet browsers, and those deals often come with steep price tags that Yahoo would struggle to afford.
Incidentally, Microsoft is well-positioned to take control of Yahoo's search business because several key former Yahoo search execs, including former Yahoo search chief Qi Lu, now work in Redmond and are intimately familiar with Yahoo's business.
Ms. Bartz has alternately played down search as a major component of Yahoo's business and pledged to drive a hard bargain in any potential deal with Microsoft.
"It has to be a deal that we trust and a deal we could get the right information and a deal where we make money," she said at a recent analyst conference. "Because, as I say to Steve, this is like me trying to buy Office ... this is not a minor little issue."
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