Can Yahoo really wriggle out of its Microsoft search partnership?

The 10-year Microsoft-Yahoo search pact continually seems like it's threatening to unravel. But will that realistically happen? If so, how -- and when?
Written by Mary Jo Foley, Senior Contributing Editor

Microsoft's 10-year search pact with Yahoo, approved by regulators four years ago this month, is either shaky or stabilized -- depending on whether you side with Yahoo or Microsoft.


On the shaky front, Yahoo management has made no bones about the fact it would love to find ways to back out of the deal. Back in October 2013, Yahoo officials attempted to use Microsoft's CEO transition as an excuse to put the brakes on its move to Microsoft's Bing Ads technology in Hong Kong and Taiwan. Yahoo wants to reestablish itself as a major player in search, as CNET and Re/code have both reported, but it's hard for the company to do so, given its pact with Microsoft resulted in Yahoo outsourcing much of its search to Microsoft with Bing.

On the stabilized front, Yahoo seemingly is getting a pretty decent chunk of change from its Microsoft arrangement. A reported December 2013 filing by Yahoo with the U.S. Securities and Exchange Commission revealed that Yahoo garnered 31 percent of its quarterly earnings from Microsoft -- substantially more than the 10 percent Yahoo had claimed publicly.

Microsoft execs have attempted to throw bones to Yahoo, specifically around revenue-per-search (RPS) guarantees, to convince management there that the Yahoo-Microsoft partnership will pan out financially for Yahoo. Microsoft and Yahoo signed last spring an agreement via which Microsoft would provide Yahoo with a guaranteed RPS rate that lasted through March 2014.

Dave O'Hara, the Chief Financial Officer for Microsoft's Applications and Services unit, characterized Microsoft's relationship with Yahoo as "good" during an investor call organized by UBS' Brent Thill on December 19.

"(W)e feel like that (Microsoft-Yahoo) partnership is in a good spot," O'Hara said during the call (based on a transcript I have of his remarks). "It was, you know, bumpy for a couple of years. But ... for the first couple of years as we got things going, but we feel like we’re at a good rhythm now."

O'Hara said that a lot of "friction" has been removed from the RPS model by Microsoft and Yahoo agreeing on a set RPS guarantee figure.

The next milestone in the Microsoft-Yahoo search partnership will be in February 2015, which is the five-year mark. As SearchEngineLand has previously reported, that's the first point where there's opportunity for Yahoo to try to get out of the deal.

At that five-year mark, O'Hara said, the two companies will take a "deeper look and see how we're performing relative to the market."

"(I)f you look at the deal, because it was a ten-year deal, what we tried to do is just build in some clauses that, you know, essentially made sure that both parties continue to invest for the long haul; that both parties continue to perform," O'Hara said. "And so that’s what the five-year mark really is; is it’s a look - just take a deeper look and see how we’re performing relative to the market. And if we are, great. If we aren’t, then, you know, they have some options they can pursue."

Microsoft characterizations aside, Yahoo seems intent on looking for search loopholes.

Re/code reported in January 2014 that there are two Yahoo initiatives -- codenamed "Fast Break" and "Curveball" -- dedicated to attempting to reestablish the company as a player in search. According to Re/code's Kara Swisher, these initiatives focus on stream, shopping and (mobile and contextual) search. CNET reported in December 2013 on Yahoo building a mock-up of a newsfeed, as well as on stealth projects around search personalization

It's worth noting that even though Microsoft is providing search results for Yahoo as part of the partnership, Yahoo did maintain the rights to its own core search technologies when the duo signed their pact in 2009.

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