Restructured Search Deal With Microsoft To Benefit Yahoo

After month-long talks, Yahoo! (NASDAQ:YHOO) and Microsoft (NASDAQ: MSFT) have restructured their search partnership, which was first established in 2009, and subsequently  extended to 2020. The amended contract gives Yahoo the flexibility to enhance the search experience on any platform as the partnership is non-exclusive for both desktop and mobile. Furthermore, both the companies have also reorganized their ad sales efforts. While Yahoo will sell ads shown through its own Gemini platform, Microsoft will now exclusively sell the ads delivered by Bing ads. Originally, the deal included a revenue-sharing agreement where Microsoft paid Yahoo 88% of Bing ads revenue delivered from Yahoo searches. The companies said that this structure would remain intact in the amended deal. In this note, we explore how this deal will benefit Yahoo.

See our complete analysis of Yahoo! here

What Does this Mean for Yahoo?

According to the restructured deal, Microsoft’s technology will power most of the search results on Yahoo’s sites. However, Yahoo can “enhance the search experience on any platform,” which means Yahoo can use other back-end search providers (such as Google or Ask) on the desktop. This puts desktop search on a similar non-exclusive footing to mobile. Even with the deal in place, Yahoo has continued to develop its own search technology with an eye to re-enter  the search engine market. The significance of the restructured deal is that that the company could partner with Google on search results, though regulatory issues might make this tricky. In 2008, Yahoo and Google planned an advertising partnership but this was derailed due to regulatory issues in the U.S.

The restructured deal continues to guarantee minimum revenue per search (RPS) that equates to a percent of Google’s estimated RPS. In the previous quarters, this has helped Yahoo’s search revenue as traffic acquisition cost has been stable, even though its search click-based revenue (excludes RPS payments) was up 18% (in Q4 2014). We believe that this trend will continue in the coming quarter too, and TAC will continue to remain low.

The restructuring follows a deal by Yahoo to replace Google as Firefox’s default U.S. search provider, and comes amid reports Yahoo/Microsoft are pursuing Apple to replace Google as Safari’s default provider (including on iOS).

We currently have a $47.55 price estimate for Yahoo!, which is 7% above the current market price.

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