NEW YORK (AdAge.com) -- Advertisers voiced strong support for the Microsoft-Yahoo search deal today, arguing that the combination is good for business, good for the internet, and possibly even good for the two companies' main rival, Google.
It's an about-face from last fall, when the ad industry was a key opponent of Google's proposed tie-up with Yahoo, a combination many thought would strengthen Google's already-dominant position in search, and lead to less choice and higher prices for keyword ads.
A key concern over Microsoft and Yahoo's deal, however, is whether it can actually work as structured, and if either can maintain their meager search share against Google during the 18 to 24 months that they expect to spend defending the deal to regulators in Washington and Brussels and then integrating the two incredibly complex businesses.
Why Yahoo turned down upfront payment
In a conference call today, Yahoo CEO Carol Bartz explained why the company ultimately decided to give up an upfront payment for the business -- what she once referred to as "boatloads of cash" in favor of a sweetened percentage of search revenue and cost savings over the 10-year deal.
Yahoo will earn 88% of all search revenue for queries originated on its network, and it will represent all premium (non-self-served) advertising for both parties for the first five years. After that, Yahoo and Microsoft have the option of dissolving the sales aspect of the deal and selling their own search inventory.
"Having a big cash payment upfront doesn't help our run-rate," Ms. Bartz said in a conference call. "It's easier to talk about boatloads of cash than it is value. The 'boatloads of cash' is us preserving our revenue line."
Microsoft CEO Steve Ballmer added that his company takes on all of Yahoo's search infrastructure costs, saving Yahoo an estimated $200 million a year in an exchange for a guarantee of 88% of its current search revenue. "The 12% is going away, but all the costs are going away," he said, adding that this is a minimum. "This is a floor, not a ceiling."
The need for a pact
The need to do this deal is stark, especially when viewed on a global basis. Google has nearly 70% of search queries worldwide, compared to Yahoo's 9% and Microsoft's 2%, according to ComScore. In the U.S., Google's share is 65%, compared to 20% for Yahoo and 8.4% for Microsoft.
Google gets an even higher share of search ad dollars because its higher query volume delivers better results for advertisers, and because many small search advertisers just advertise on one platform. Or if they do use more than one, they will use Google plus either Yahoo or Microsoft, but not both.
This dominance has become a key concern for advertisers and marketers as they look to drive efficiencies in their search-advertising budgets, and a key reason many opposed Yahoo's attempted deal with Google last year.
"Google and Yahoo together became the entire market," said Nick Beil, CEO of Performics, part of Publicis Groupe. (Performix was acquired by Google as part of the DoubleClick deal, but was sold to Publicis a year ago.) "I don't think [Microsoft and Yahoo] are going to run into issues."
While it decreases the number of players from three to two, advertisers said the impact will increase choice, because even some large agencies don't port their search campaigns to all three because of the complexity and cost of doing so.
"We think this is good for the ecosystem; it will attract a larger pool of advertisers out of the long tail which now are using Google or Google plus one," said Rob Norman, CEO of Group M Interaction.
Google may still gain share
Yet agency execs also expressed concern that Google would gain share over the two years it could take both sides to complete the integration.
"The challenge is going to be how Bing and Yahoo are going to maintain their competitive position to Google during the year-and-a-half to implementation," said Bryan Wiener, CEO of independent agency 360i. But, he said, the greater concern is that without a deal "there was a 50-plus point spread between Google and the No. 2 player and that gap was widening."
Then there are the potential logistical problems of a sales force reporting to one company and technology to another. Yahoo will be charged with selling all search ads, while the search platform will be powered by Microsoft technology -- Bing on the consumer search side, AdCenter on the ad-buying side.
That creates some potential confusion and conflicts, especially from a management standpoint. Who will be responsible if, say, sales aren't going well? Who will the search sales team answer to? Who's to blame if a search sale isn't executed properly -- Yahoo or Microsoft? And whose fault is it if revenue per search lags?
Yahoo Exec VP Hilary Schneider told Ad Age that the deal is structured so both sides are "mutually dependent." In other words, they can't afford not to get it right.
The deal raises the possibility of a more-robust bidding war for AOL's search business when its deal with Google expires in December. AOL has long outsourced search and represents a very big potential user base if Microsoft wanted to add distribution. Asked about that possibility, Microsoft Senior VP Yusuf Mehdi said, "I think for today, Yahoo is more than enough."
Their biggest challenge
The biggest challenge Microsoft and Yahoo face is getting antitrust approval for the deal, and ironically they may face some of the same arguments that Microsoft used to stop Google and Yahoo less than a year ago.
Namely, Microsoft argued that the Google-Yahoo deal would remove Yahoo's incentive to invest in search, and would lead to Yahoo gradually exiting the search business. Now, Microsoft is proposing to take Yahoo out of the market completely. Second, Microsoft argued that the deal would lead to higher keyword pricing, which is also a likely outcome of their current proposed deal.
For its part, Google said it didn't believe those arguments then and won't give them credence now. Google expects the Department of Justice may ask the company's opinion on the matter, but it does not expect to actively oppose the deal.
"There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users," Google said in a statement. "We're interested to learn more about the deal."
Many advertisers have already been briefed on the deal and Microsoft and Yahoo are continuing their outreach to major clients today. To generate support for the deal, Microsoft again tapped consultant Michael Kassan, who worked on behalf of the software firm to rouse Madison Avenue opposition to last year's Google-Yahoo deal.
Even advertisers generally supportive of the deal said it would probably lead to higher prices for keywords, but also likely better effectiveness for campaigns on Bing.com. "You will have greater advertiser density and more competition so there could be an escalation of bid prices," said Kevin Lee, CEO of search marketing firm Didit.
Overall, however, the consensus is that this is a net positive for marketers. "Anything that creates a credible platform and more innovation in search is going to be good for consumers and, therefore, good for advertisers," said David Kenny, managing partner of Publicis unit VivaKi.
And by encouraging competition and diverting regulator attention away from Google's dominance, it's probably pretty good for Google as well. "It's good for competition," Mr. Beil said, "and will rev Google's engines even harder."