Google has little to fear from Microsoft-Yahoo deal

Microsoft Corp. and Yahoo Inc. hope that the consummation of their long-anticipated online search agreement late last month will give them a boost in their frustrating battles with common rival Google Inc. Analysts, though, say the search giant probably has little to fear from the combined effort — at least in the short term.

The 10-year agreement calls for Microsoft's new Bing search engine to power Yahoo's search sites, and for Yahoo to sell premium search advertising services for both companies. The companies said they expect the deal, which must be reviewed by U.S. and European regulators, to close early next year.

Analysts do say that the Microsoft-Yahoo partnership should provide each company with some much-needed leverage in their ongoing — and, until now, separate — battles to loosen Google's longtime stranglehold on the search market, though none expect it to lead to any dramatic changes in that arena.

In terms of search market share, both Yahoo and Microsoft have long lagged far behind Google, which held nearly 80% of the market in June.

“Both Microsoft and Yahoo need this deal if they harbor any hopes of getting back into the lucrative search game,” said Dan Olds, an analyst at Gabriel Consulting Group Inc.

Separately, “Microsoft and Yahoo have invested billions of dollars in trying to build search and content portals that would be able to command Google-like ad revenues. But both have failed to blunt Google's revenue growth,” he said. “With a well-executed plan and solid cooperation, they have a shot [together] of at least giving Google a run for its money.”

However, Olds added that Google “has had plenty of time to plan for [a Microsoft-Yahoo partnership]. I would expect [Google] to continue to tend to business.”

“It's not like this is going to change the world or turn things upside down,” said Karsten Weide, an analyst at research firm IDC. “This is going to make Microsoft and Yahoo more competitive, but it's not going to dethrone Google.”

A Google spokesman said that the company is “interested to learn more about the deal.”

The agreement comes about two months after Microsoft revamped its much-maligned Live Search tool and relaunched it as Bing, which is already taking market share from Yahoo's search engine and even a bit from Google.

At the same time, Yahoo has a larger network of search advertisers, which are now more accessible to Microsoft.

After full implementation, which the companies anticipate will come about two years after regulatory approval, Yahoo expects the agreement will generate about $500 million in operating income and a savings of about $200 million in capital expenditures. The company also expects to add $275 million to its annual operating cash flow.

According to a filing with the U.S. Securities and Exchange Commission last week, Microsoft will pay Yahoo $50 million per year for three years and hire at least 400 Yahoo employees.

Rebecca Jennings, an analyst at Forrester Research Inc., said the deal should boost Microsoft's share of the U.S. online advertising market to about 30%, up from 8% to 9% today. That would translate to significant dollars, since Jennings projects that the market will grow by about 15% annually and reach about $30 billion by 2014.

Yahoo benefits by no longer needing to invest in its search engine, which was not gaining traction against Google anyway, Jennings said.

But Yahoo's abandonment of its search engine could also be the beginning of the end of Yahoo as an independent company, analysts said.

Jim McGregor, an analyst at In-Stat in Scottsdale, Ariz., suggested that Yahoo will likely merge with Microsoft before the close of the contract period.

“Once you give up a key part of your business, it's hard to regenerate that,” McGregor said. “What you do is merge with your partner. And a 10-year deal is kind of unheard of in this industry. They did this as a permanent thing.”