Microsoft-Yahoo Finally Strike a Deal, but It's Not a Big Deal, says Wharton ExpertGoogle blog

After an tumultuous 18-month courtship, Microsoft and Yahoo have finally consummated a deal to meld their search services and online advertising technologies. But the partnership poses little threat to search giant Google, according to Wharton marketing professor Peter S. Fader.

“The deal has no impact on consumers or on the search market," Fader said today. "This is a total non-story. The only reason it's news is because of the names of the companies and their long and sometimes bitter history.”

Microsoft and Yahoo called a news conference this morning to announce the 10-year agreement in which Yahoo will use Microsoft’s Bing search and advertising technology across all Yahoo properties, and Microsoft will use Yahoo's sales force for search ad sales. There is no upfront payment as part of the deal, although the companies will share search revenues with Yahoo receiving 88% during the initial five years of the agreement.

The deal allows both firms to reallocate resources and play to their strengths, but Fader, who co-directs the Wharton Interactive Media Initiative, believes it is unlikely to reallocate market share. In June, Google commanded 65% of the search traffic on the Internet, Yahoo and Microsoft shared about 28%, according to comScore. Despite incremental gains for its new Bing search service, Microsoft has yet to made a significant dent in Google’s market share.

Microsoft's new and improved search engine, Bing, has had little impact on Google's traffic,despite a considerable marketing effort. "If Bing was amazingly better than Google … it might grab some market share," said Fader. "But it's not. To use a baseball analogy, this deal is like the San Francisco Giants picking up a big player who will get them to a distant second place – and there’s no wild card to get them into the playoffs."

Indeed, Fader argued, Bing and the marketing campaign to support it "is a red herring aimed at Yahoo, to push them aside or into a deal, which is what it accomplished." He noted that the same strategy was deployed by Visa in a marketing campaign in which it compared itself to American Express. The real target of that campaign was MasterCard.

The deal announced today is a long way from Microsoft's unsolicited bid to take over Yahoo back in February 2008 — a fact which might turn out to be a benefit to both companies. As Wharton Management professor David Hsu told Knowledge at Wharton at the time, the broad scope of original deal would have presented numerous challenges. "When we think about the previous cases of success versus failure in these mega-acquisitions in the technology or Internet space, that track record does not look good."

The smaller deal may also invite less antitrust scrutiny, allowing the arrangement to go through more quickly. The companies stated that they hope regulatory approval will be forthcoming in 2010.

Despite all the ups and downs of the negotiations, in the end, Microsoft gets the one thing it wants: a bigger presence in the online search market. As Wharton management professor Lawrence G. Hrebiniak told Knowledge at Wharton in February 2008, getting a larger share in the search market was critical for Microsoft. "Let's put it this way: There is no other hope if they want to compete with Google. I can't think of any other way to compete."

In an interview with Knowledge at Wharton last year, Microsoft chief research and strategy officer Craig Mundie, stressed the importance of scale in the search market: "Once you get to scale, the economics are very favorable. Even if you had perfectly equivalent technology, if you start late — which we admittedly did on the advertising side — you have to work hard to get back to scale. You're always at a disadvantage. No matter how much money you have, you have to build up to scale. It just takes time."

In spring 2007, Microsoft chief software architect Ray Ozzie told Knowledge at Wharton that Microsoft needed to "take a different approach toward search than simply trying to copy Google's success," stating: "History has shown that any time you have a fairly significant market leader, the best way of competing is not to just simply take the same approach." In video released today, Microsoft CEO Steve Ballmer stressed his view that Microsoft's new search engine, Bing, "makes search more relevant to consumers and more than just a list of blue links."

And way back in November 2006, when Microsoft CEO Steve Ballmer spoke at Wharton, he pointed out that Google "didn't invent search. They weren't the first guy to the party." Ballmer underscored that Google spent "six, seven, eight years before it established a position [in search] and beat AltaVista and Yahoo." Ballmer continued, "We're getting the basics right. We think that we have some clever ideas coming, but you know we're going to be in there battling for years and years and years." Now, years later, Microsoft just fired the latest volley in that battle.

More from Knowledge at Wharton:

Carol Bartz's Challenge at Yahoo: Choose a Path, Build a Team and Do It Fast

Microsoft and Yahoo: Does It Make Sense (and Will It Work)?

Fast Forward: Tech Giants Scramble For Bigger Piece of Growing Online Ad Market

Will Its 'Chrome' Web Browser Put a Shine on Google's Long-term Strategy?