The group talked about the initial deal Microsoft offered Yahoo last year to buy Yahoo outright, the complicated nature of this new deal, Microsoft Bing, Yahoo walking away from the search fight rather than engaging, how this was the worst of the deals that Microsoft had offered so far, the Bartz/Ballmer reaction, what this means for Microsoft versus Google now, and the possible antitrust implications of all of this.
Watch the part of the show that featured the discussion below.
And here’s the transcript:
CHARLIE ROSE: Microsoft and Yahoo! announced yesterday a partnership in the search and advertising business. Under the deal, Yahoo!`s websites will be powered by Microsoft new search engine, Bing . Yahoo! will get 88 percent of the ad revenue from searches on its sites for the first five years. With the partnership, the two hope to take on Google, which currently commands about 65 percent share of the U.S. market. The agreement follows Microsoft`s failed takeover bid for Yahoo! and shows the continuing importance it is placing on search.
Joining me now from Redmond, Washington, is Nick Wingfield of the “Wall Street Journal.” Here in New York with me, Steven Levy of “Wired” magazine and Erick Schonfeld, co-editor of TechCrunch blog. I am pleased to have all of them here.
Nick, tell me how this deal happened, first.
NICK WINGFIELD: It started last year with the CEO of Microsoft, Steve Ballmer, making an unsolicited bid for close to $48 billion to acquire Yahoo!. Never happened, Yahoo! resisted the offer. It fell apart.
Fast forward to about January. Yahoo! has a new CEO, Carol Bartz, and Microsoft and Yahoo! start talking about a more limited deal, not a full-blown acquisition, in which Microsoft basically take over the search operations, handle the search operations on Yahoo! in exchange for some value. And the deal went through all sorts of fits and starts, and finally arrived at the deal you described a moment ago.
All of this being designed to improve Microsoft`s fairly poor position in search right now, which is a highly lucrative market, the online advertising market that accompanies search, and one that Microsoft really has not had much success in on its own.
CHARLIE ROSE: Is this a good deal for just Microsoft or good deal for Microsoft and Yahoo!?
NICK WINGFIELD: Well, the shareholders of both companies seem to think it`s a better deal for Microsoft than it is for Yahoo! The stock of Microsoft went up a bit yesterday and up a bit today. Yahoo! is down.
One of the problems Yahoo! has is that they had sort of almost set expectation that they were going to get a big check, a multi-billion dollar check from Microsoft in exchange for a deal of this sort. And that didn`t end up happening. Instead, what Yahoo! is getting is very high percentage of the ad revenue from advertising sold on searches that Microsoft delivers. So, both parties argue that it`s better for Yahoo! to get this, because they`re getting more — a bigger chunk of the share of ad revenue on an ongoing basis, but there is no big upfront check, and that seems to disappoint people.
CHARLIE ROSE: So, what`s the judgment of people who are looking at it in terms of whether Yahoo! would have been better to take the original deal that Ballmer offered or take the deal they have now?
NICK WINGFIELD: Well, I don`t think there`s any question that Yahoo! shareholders would be better off if they had accepted the original $48 billion deal. I don`t know what Yahoo!`s latest market capitalization is, but they`re down a lot.
So, I don`t think Microsoft, though, regrets not acquiring all of Yahoo! I think they`re fairly happy with the position that they`re in. They also have managed to improve their own home-grown search engine, which is now called Bing, and have started to inch up a little bit in market share. So I think Microsoft probably comes out a little bit ahead here, but still, both parties argue that Yahoo! is going to thrive as well because they no longer have to invest in search, so they can be a lot more profitable.
CHARLIE ROSE: Is this going to work?
STEVEN LEVY: It has a lot of hurdles. I think the upfront money really isn`t the key to Yahoo! The key is, Yahoo! is disbanding their search team, their engineering, and disbanding the team which built their advertising engine to sell ads on search. Now, these happen to be some of the most important aspects of engineering at a company there. And really, if Yahoo! wants to be a top Internet company, it has to have the engineering chops to keep doing that.
So, it`s going to miss out on that. And it will save money by not hiring — having those people to pay, but those are the people you want in your company.
Also, this deal is a little complicated. Yahoo! actually is going to sell some of these ads to the premium customers. A lot of customers, those in the long tail, they just go on the website and buy the ads just straight there like you buy something from Amazon. But a big customer needs someone to work with them and tell them what words to buy. It`s very complicated in how much to bid, because these things are all done by bids. And Yahoo! is doing that part, and Microsoft has the technology, which means those people who work for Yahoo! are really going to have to go back and forth to Redmond and talk to a lot of people to be familiar with how that works there. So there`s a little complication in how they`re going to be able to do that, which is going to make it a little more difficult for Microsoft`s big task, which is to take on Google and build up its ad share to something beyond even what it has combined with Yahoo!
CHARLIE ROSE: Did Bing make a difference here at all, the fact that Bing has gotten — the Microsoft search engine has gotten good reviews?
ERICK SCHONFELD: I think Bing made a big difference, because Yahoo! was in a tough position. It was seeing market share eroding from the top, from Google, and now the prospect of market share erosion from the bottom, from Bing. Bing has only been out for two months, but it`s made a little bit of a gain in share, .4 percent. Is that going to last over time? Who knows. But Yahoo! didn`t want to find out. Right?
And the big problem here is that Yahoo! really — they kind of walked away from the most interesting fight on the Internet right now, which is search. And they handed it over to Microsoft for less than any of the previous deals that were on the table. The four real deals that were on the table going back to the $45 or $48 billion offer in February of 2008, the revised search deal that Microsoft offered, which included $8 billion to buy 16 percent of Yahoo! and $1 billion payment for the search part of the business. The Google deal that got squashed, that guaranteed $800 million in revenues.
This deal was the worst of all the deals. And as Steve mentions, the deal introduces a lot of complexity, right? So now you`re going to have Yahoo! sales people selling Microsoft`s search product. So Yahoo! sales people already have enough problem talking to Yahoo! engineers. Now they have to talk to Microsoft engineers. And what if something goes wrong? Who are they going to yell at? Are the Microsoft engineers going to like that, being yelled at by Yahoo! sales people?
CHARLIE ROSE: Nick, you`re in Redmond. What does this do for Steve Ballmer?
NICK WINGFIELD: Well, it gives him a real fighting chance in a market that he said is strategic to the company. They have about 8.4 percent market share on their own with Bing. With Yahoo!`s market share, they could go to 30 percent of shares — 30 percent of searches in the U.S., and that`s significant.
Now the question is, does it decline from there? Can they increase it? If they do that, you know, how much money do they make off of it? Because of course, Microsoft is losing money in its Internet search business right now. But they just want to gain the share. They argue once they gain the share, they get eyeballs. Search is a scale business, that they will start to improve the quality of the search, because they can do all sorts of things, make ads more relevant. And if they do that, they think they can have a flywheel effect and start really eating into Google`s share.
The other thing that this lets them do is, Google is not only strong in search with 65 percent plus share, but Google is also moving into these other areas that are quite threatening to Microsoft. They`re using their profits in search to get into operating systems, into online applications that are free, that threaten these cash-cow businesses like Office and Word and Excel. And they just recently announced that they`re going to be doing an operating system for laptops. They already have one for mobile phones. And I think Microsoft wants to gain share in search in part to help alleviate that threat.
CHARLIE ROSE: And what about the leadership of Yahoo!? Carol Bartz?
STEVEN LEVY: Well, she felt she had to do something. But I think in this case, by targeting the search team and taking it away, some people wonder whether that`s going to really take the glue, which keeps her portal together there.
The search that Yahoo! did had, you know, about three times the size of what Microsoft search, mainly because so many people come to Yahoo! and they search there. So it really was an opportunity for Yahoo! to grow out there and do more.
She says this is going to enable them to concentrate on the other things that they do. But having a very strong search team and engineering that comes with that search, and with the really complicated engineering you have to do to be able to sell ads on searches, that`s very complex. And you know, for reasons we can get into, it really helps if your share grows. Not having that, those engineers aren`t going to be able to filter through the rest of the company to help you do these other things there. If you look at the team now, gee, what are they going to do? It`s going to take well over a year for this to come to fruition with this deal there. So if I`m working as an engineer for Yahoo! now, what`s my future?
CHARLIE ROSE: That`s — and losing talent is the big issue so much, because they`re creating the new software and building on the old.
STEVEN LEVY: And who is one of the most talented people at Microsoft, the one they all talk about there, is Qi Lu, the guy who came from Yahoo!, and went to Microsoft. He`s now the big technology leader, the bright guy who is leading Microsoft search.
CHARLIE ROSE: All right. What about AOL? What`s going to happen to AOL?
ERICK SCHONFELD: So, I think AOL is a great example here, because you`ve got Tim Armstrong, who came from Google, who is now the new CEO of AOL, and he took what was really a hobbled company, and is taking it in a new direction, away from the sweet spot that Google or Yahoo! or Microsoft already dominate in. He`s hiring hundreds of journalists, which as you know from your Politico piece, that you know, they are very, very valuable assets. And is kind of creating — that`s just one part of his business — is creating this sort of new newsstand online. And is doing a lot of interesting things.
And so why didn`t Carol Bartz do that? Why didn`t she double down? You can make the argument that you know, ultimately she had to do something, because she doesn`t have Microsoft`s Windows money and she doesn`t have Google`s search money. So ultimately search is an expensive game and maybe she has to get out of that business, ultimately.
But Microsoft needs her search volume. Why not double down, invest in search, and get a better deal down the line? Or merge with AOL when they become public?
CHARLIE ROSE: Speaking of one final issue, anti-trust, Nick. Is Google worried about anti-trust ramifications of its market share? Will this deal be subject to anti-trust implications, questions?
NICK WINGFIELD: Well, Google is I think worried, yes, about their future in anti-trust. In this particular case of Microsoft and Yahoo!, they argue that together they have 30 percent of the market, compared to Google`s 65 percent. And so they think they are going to have a pretty strong case with the anti-trust regulators. They are definitely going to face some tough scrutiny. They`re prepared, I think, to really fight with Google, but it`s unclear what Google is going to do. There was some talk today at this Microsoft meeting I was at of Google employing sort of third-party advocacy groups to fight the deal. But Google really is the big gorilla here. So it`s a little challenging for them to make an argument that this is going to be anti-competitive. Google has…
STEVEN LEVY: There`s a really delicious irony here, because last year, when there was the threat of Microsoft buying Yahoo!, Google wanted to make a deal with Yahoo! for the search. It was not on the scale of this, and Microsoft complained about it, and said to the Justice Department, successfully argued that, hey, we can`t do this, because Yahoo! would end its search team. There would be less competition in there. Guess what?
CHARLIE ROSE: They`ll take over their search team. Yes.
Is there a feeling with the search — Bing getting good marks and now this deal, that Microsoft is back and that Microsoft can deliver a lot more than people, or may be much stronger than people assumed it was, say six months ago, when the effort to buy Yahoo! came to nothing?
NICK WINGFIELD: Well, there definitely is a feeling that they are on an upswing in terms of the quality of their products. Windows 7 is coming out, which they hope will erase the sort of disdain of Windows Vista, which was a very troubled operating system for them with some technical problems. Bing is doing well. They have done some innovative stuff in games. But they`ve also got some real challenges. For example, some people think that they have placed too much emphasis on search and neglected mobile phones. They have a pretty poor offering there. And Apple`s got the iPhone and others are doing very well in that category. So they`ve got some big challenges in other areas as well.
ERICK SCHONFELD: Microsoft no doubt is better off today in search than it was before. But we shouldn`t overestimate what their advantage is. Even if they have 30 percent of the search market share, they don`t have 30 percent of the revenues, because they`re giving 88 percent of that back to Yahoo!
CHARLIE ROSE: Exactly. Nick Wingfield, “Wall Street Journal” here. Erick Schonfeld from TechCrunch and Steve Levy from “Wired,” thank you all.