Microsoft banks on behemoth factor in Yahoo search deal

Microsoft is hoping that a long-term partnership with rival Yahoo will give it the size and insight it needs to bring in more traffic, more advertisers and ultimately more revenue.

By handling Yahoo's searches along with its own, Microsoft can learn more quickly what works and what doesn't. A smarter search engine might draw more internet users, and more advertisers could follow, driving up prices.



Size, though, may wind up being far from the magic bullet that Microsoft is counting on in forging a 10-year partnership to power all Yahoo searches.



Search leader Google has had a head start in technical development, and Microsoft already has had plenty of search queries to analyse - yet it remains stuck at No. 3. Adding more data might not make a difference.



"They have lots of scale. They have lots of traffic. Even being the third-place player, they have huge amounts of data to understand their own relevancy," said Danny Sullivan, editor of the search news site Searchengineland.com. "I just don't know why they keep putting that argument out."

The deal still needs regulatory review on such issues as whether it will promote or hinder competition and how the two companies will share the personal data collected in searches.



If approved, Microsoft's technology will process Yahoo's searches behind the scenes. The only nod to Microsoft will appear - with credit placed at the bottom of the page - when a user gets results from a web search.



In exchange, Microsoft will keep 12 per cent of the ad revenue those searches generate. That's a better deal for Yahoo than most agreements of this sort, though the terms go up for review halfway through the deal.



Microsoft has yet to turn a profit on its search and advertising business despite having invested billions.



The software maker's stockholders so far have been guardedly positive about the deal, perhaps because it did not require a US$9 billion upfront payment to Yahoo, a condition of a similar deal proposed last year.



If Microsoft can't use this partnership to improve its search finances, though, they will eventually run out of patience.



Microsoft expects to spend up to $700 million to get the arrangement up and running, something that could take two years to fully deploy worldwide. It may spend up to $200 million within the next 12 months alone.



But the company believes it's worth it.



With the partnership, Microsoft will funnel Yahoo's nearly three billion monthly web searches. Add that to the one billion Microsoft gets on its own, and the software maker will quadruple the queries it processes, allowing its search engine to gain even more insight into how to improve the experience.



Every move a search user makes is fed back into the system, so when the next person comes along with a similar problem, the search engine is a little bit smarter about solving it.



For example, if five people in a row click on the fifth link on the results page for "Seattle Space Needle," the search engine - a sophisticated computer program - might try moving that link up to the top.



When search results give people what they're looking for right away, they're more likely to come back. It's a case of the sum totalling more than its parts: The deal is about more than simply combining search traffic from the two sites.



More people doing more searching on Microsoft-powered sites should then attract more companies wanting to peddle their products through short text ads next to search results.



Some may not have bothered advertising on Microsoft and Yahoo separately, because as separate sites their audiences were too small to make up for the hassle of recreating Google search ad campaigns on a second and even a third system.



Those advertisers may be enticed by the convenience and reach of this partnership, or by the idea of having a solid second place to spend their ad dollars to keep Google in check.



A bigger number of ads in the hopper gives Microsoft's technology a better chance of plucking out one that entices someone to click. The more times Microsoft watches someone click an ad - or not - the better its formula becomes for making the right match.

And because search ads are sold auction-style, more advertisers vying for those spots should drive up prices, ultimately helping Microsoft eke out a bit more from every ad it sells.



Right now, Microsoft estimates that Google gets 7 cents in ad revenue for every search, while Yahoo gets 4.3 cents and Microsoft gets 3.9 cents, according to a PowerPoint slide Microsoft mistakenly posted online.



Once Microsoft is handling Yahoo's searches, Microsoft predicts revenue per search for both companies will rise to 5 cents. Subtracting the commission Microsoft will pay Yahoo, Microsoft expects to start making a "decent" return of $400 million.



"The number of searchers is a vital driver of success," said Tim Cadogan, CEO of online advertising company OpenX and a former senior vice president in Yahoo's advertising division. "Being able to get nearly 30 per cent catapults Microsoft from a tougher position to a more viable place from which they can build."



And build it must. Google gets about two-thirds of US search queries, according to comScore.



Yahoo handled about a fifth of US searches in June, and Microsoft fielded less than half of that. The partnership would bring the two companies' combined share to nearly 30 per cent, still less than half of Google's total.



Staying a distant second to Google will leave Microsoft perpetually playing catch-up while Google keeps getting better. In other words, there are almost never enough data.



And that assumes size is all that's holding Microsoft back, a premise that Gartner analyst Andrew Frank described as "an overly simplistic view of Google's accomplishments."



Google had a head start on Microsoft and Yahoo in fine-tuning its search advertising system based on what works and what doesn't, making note of everything from the number of ads on a search results page to their exact size, placement, spacing and colour.



When someone does a web search, Google does more than simply spit out an ad that matches the keyword. Google weighs many factors to figure out how likely a user will click on an ad. An oft-clicked ad on a common search might be shown first, even if it brings in less revenue than a less popular but more lucrative one.



Microsoft has smart computer scientists working full-time on the same puzzle, but Google's lead is formidable, and Microsoft's devotion to search pales compared with cash cows like Office and Windows.



Ultimately, the Redmond, Washington-based software maker may have to settle for something less tangible.



Google has been making incursions onto Microsoft's home turf, the software that makes computers run and helps people get their work done.



By stepping up its game in search, Microsoft may ultimately force Google to focus on its core search engine rather than its fledgling software business, including a recently announced Chrome operating system that could challenge Windows.



Microsoft may be able to claim victory even if it cannot turn size into dramatic search revenue growth.

Life and Style
ebookNow available in paperback
ebooks
ebookA delicious collection of 50 meaty main courses
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Gadgets & Tech

    Recruitment Genius: Technical Author / Multimedia Writer

    Negotiable: Recruitment Genius: This recognized leader in providing software s...

    Recruitment Genius: IT Sales Consultant

    £35000 - £40000 per annum: Recruitment Genius: This IT support company has a n...

    Recruitment Genius: Senior IT Project Manager

    £55000 - £70000 per annum: Recruitment Genius: This is a fantastic opportunity...

    Recruitment Genius: iOS Developer - Objective-C

    £38000 - £45000 per annum: Recruitment Genius: Design and build advanced appli...

    Day In a Page

    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
    Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

    The Arab Spring reversed

    Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
    King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

    Academic claims King Arthur was real - and reveals where he lived

    Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
    Who is Oliver Bonas and how has he captured middle-class hearts?

    Who is Oliver Bonas?

    It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
    Earth has 'lost more than half its trees' since humans first started cutting them down

    Axe-wielding Man fells half the world’s trees – leaving us just 422 each

    However, the number of trees may be eight times higher than previously thought
    60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

    60 years of Scalextric

    Model cars are now stuffed with as much tech as real ones
    Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

    Why are we addicted to theme parks?

    Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
    Tourism in Iran: The country will soon be opening up again after years of isolation

    Iran is opening up again to tourists

    After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
    10 best PS4 games

    10 best PS4 games

    Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
    Transfer window: Ten things we learnt

    Ten things we learnt from the transfer window

    Record-breaking spending shows FFP restraint no longer applies
    Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

    ‘Can we really just turn away?’

    Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
    Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

    Nine of Syria and Iraq's 10 world heritage sites are in danger...

    ... and not just because of Isis vandalism
    Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

    Girl on a Plane

    An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    Why Frederick Forsyth's spying days could spell disaster for today's journalists

    The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent