Analysts: Microsoft Deal Bad For Yahoo

Microsoft and Yahoo have entered into a ten-year deal, giving Microsoft access to the Internet's second-largest search engine audience. Yahoo estimates the deal will boost its annual operating profit by $500 million. Some analysts say this is a bad move for Yahoo, which hasn't been able to turn its popularity into a major financial success.

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The Internet business world is buzzing about the new Internet search alliance between Microsoft and Yahoo. We reported on this yesterday. Under the deal, Yahoo will use Microsoft's search engine instead of its own, and Yahoo says the deal will increase its profitability. Analysts, though, are not so sure.

NPR's Laura Sydell reports.

LAURA SYDELL: In the young world of Internet businesses, Yahoo is one of the oldest companies. It remains one of the most popular sites on the Web and offers an array of services: email, finances, IM, flicker, maps. Yahoo's CEO Carol Bartz told NPR the company will put even more energy into making their services better now that search technology is in someone else's hands.

Ms. CAROL BARTZ (CEO, Yahoo): So it allows Yahoo to really focus on having even better online experience through our home page and finance boards, etc., and still have our customers enjoy the search experience.

SYDELL: The search experience will be powered by Microsoft's new search technology, called Bing. The two companies signed a 10-year pact. Yahoo's sales force will sell all the ads and get 88 percent of the revenue. Last year, Microsoft tried to buy Yahoo for more than $47 billion. Yahoo rebuffed the offer, to the displeasure of many of its shareholders. In the new deal, Microsoft isn't offering up any cash, and Yahoo stocks went down after the announcement. But CEO Bartz says in the long run, Yahoo will have more funds to grow.

Ms. BARTZ: Yahoo does not need cash. We have plenty of cash. We just want to have operating leverage, which is what we get through revenue.

Mr. JASON CALACANIS (Founder, Mahalo): I believe Yahoo committed seppuku today. I mean, they basically took the sword, stuck it into their stomach and cut themselves open.

SYDELL: Jason Calacanis runs Mahalo, a company that combines search and social networking. Calacanis thinks search is going to continue to be the biggest moneymaker on the Web, and Yahoo should not be sharing its success with Microsoft. Yahoo's search engine was number two behind Google with 20 percent of the market, and Microsoft has only about 8 percent.

Mr. CALACANIS: Search is an unprecedented opportunity for advertising. When you do a search, you make a gesture. You type a word into a box, whether that word is Toyota Prius or Pizza in Santa Monica. You've basically told the advertising engine what you want.

SYDELL: Calacanis thinks that Microsoft is the big winner because its search engine is going to grow by association with Yahoo's popular Web properties. In fact, Google got its original boost by being Yahoo's search engine. Microsoft's search engine, Bing, was unveiled recently to relatively good reviews, and the company's been willing to spend a lot of its capital on research and development to get ahead of Google and Yahoo. Allen Weiner, an analyst with Gartner, a technology research firm, thinks Yahoo made the right move.

Mr. ALLEN WEINER (Analyst, Gartner): Even if they're still ahead in market share, they would need to spend a lot of money in R&D to keep up to where Microsoft was going to be in search, and where Google is the market leader.

SYDELL: Weiner believes that when the market bounces back, online banner advertising for Yahoo's online services will start to bring in considerable revenue. However, he agrees that Yahoo may ultimately become a much smaller company. Yahoo officials say users won't see any change for another two years. The Justice Department will have to investigate the deal for antitrust violations. If the deal goes through, the joint operation will have about 30 percent of the search market. And everyone agrees that a merged Yahoo-Microsoft search engine will be much more appealing to advertisers.

Laura Sydell, NPR News, San Francisco.

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