It all makes sense: prominent ex-Googler Marissa Mayer takes over Yahoo, which uses Microsoft's Bing as its search provider. But Microsoft has failed to live up to its contract with Yahoo, leaving Yahoo free to sign a search deal with Google, right? Wrong.
In fact, the Department of Justice blocked a similar arrangement in 2008. And according to one lawyer who served in the DOJ’s Antitrust Division for more than a decade, the DOJ would be fully prepared to do it again. Unfortunately for Yahoo, that means that Microsoft's failure to provide high-value search results won't let it off the hook.
In other words, Yahoo could be legally prevented from turning away from a search technology provider - Microsoft, and its search service, Bing - that has consistently failed to meet its contractual expectations. It would likely not be free to choose a new partner - Google - instead. Talk about a bad date that won't end.
An Opportunity Knocks?
Google chairman Eric Schmidt met with reporters early Tuesday morning in Tokyo, where he was on hand to launch the company's Nexus 7 tablet in Japan. Schmidt took Apple to task for choosing to develop its own spotty Maps application, and also reportedly expressed interest in replacing Bing as Yahoo’s search provider.
Forbes’ Eric Jackson confirmed with Dow Jones reporter Kenneth Maxwell that Schmidt at least expressed an interest in working with Yahoo. “Yes, I can confirm, Eric Schmidt definitely said they’d be interested in working with Yahoo U.S.,” Maxwell told Jackson. “He also said nothing doing for the time being, but they would be interested.”
Representatives for Google could not be reached for comment.
Bing Is Not Doing The Job
Why would Yahoo like to sever ties with Microsoft? Because, to be frank, Bing hasn't delivered.
Under the agreement approved in 2010, Microsoft's Bing powers Yahoo's own search engine on Yahoo's sites, while Microsoft gets an exclusive 10-year license to Yahoo's search technology. Yahoo receives 88% of all the revenues from search ads on its site for the first five years of the agreement - and it handles the sales for Microsoft's and Yahoo's premium search advertising inventory. Yahoo’s role was to surround the search results with its own rich content, selling ads to high-volume advertisers; Microsoft represented smaller, self-service clients.
The key, though, was a metric that wasn’t in the original press release: a Revenue Per Search (RPS) guarantee that protected Yahoo. If Microsoft could truly provide a better experience than Yahoo’s own search technology, fine. But if Microsoft failed to hit that undisclosed number, Microsoft would be forced to pay Yahoo an also undisclosed penalty.
But Microsoft hasn’t hit its numbers. Not once. As Search Engine Land extensively documented in July, Yahoo first began complaining about the problem in April 2011, citing an undisclosed gap between the actual RPS figure and what Microsoft was obligated to provide. In July and October, Microsoft reduced the gap by 20% and 10%, respectively. But since then, Microsoft’s progress has tailed off: improving between 5% and 9% in January, and nothing in April and July.
The wrinkle, however, is that the RPS agreement has a fixed lifespan; it was originally supposed to expire sometime this year. But last October, Yahoo interim chief executive Tim Morse extended the RPS agreement until March 2013.
So what can Microsoft do to improve? For now, company representatives aren’t saying. But Microsoft is also keeping its chin up. “We continue to work closely with Yahoo and have seen improved RPS performance,” Tom Phillips, senior director of Microsoft Advertising, said in an email statement to ReadWriteWeb. “It is a long road, but we’re making progress and are confident we’ll get there together.”
The Google Option
As far as search technology is concerned, U.S. companies really have only two options: Google and Microsoft’s Bing. Within the U.S., Google’s network of sites commanded 66.8% of all queries in July, ComScore said, followed by Bing at 15.7%. Yahoo’s own Bing-powered sites ranked third, at 13.0%. The market then drops into the dregs: Ask.com at 3.1%, and AOL at 1.5%.
China’s Baidu could be considered a third choice, although its market strength in China is as much a testament to Google’s decision to back out of search in China in 2010 as to its own expertise. Apple attached Baidu’s search to an upgrade of its iPhones and iPads in China in June.
Yahoo’s new chief executive, Marissa Mayer, clearly understands the value that Google brings to the search table. She undoubtedly knows exactly how much a typical display ad sells for on Google, and knows that developing a composite user profile from a Google user’s email, calendar, location and other sources of information makes him or her more valuable than someone who is not logged in.
According to Business Insider, Mayer’s priorities include “user growth, ad sales, improving ad tools, and attracting better talent,” based upon an all-hands meeting she held this week.
So, if Bing isn't cutting it, ex-Googler Mayer can strike a search deal with her old employer, right?
Why Google Is Not An Option
In 2008, Google and Yahoo struck a proposed advertising deal that would have done just that. But the Department of Justice’s Antitrust Division was preparing a formal investigation of the arrangement, according to the Washington Post. The deal also attracted the attention of Sen. Herb Kohl, D-Wisc., chairman of the Senate Antitrust Subcommittee, who promised to hold hearings about this issue on Capitol Hill.
Allen P. Grunes, a shareholder at Washington D.C. law firm of Brownstein Hyatt Farber Schreck, who worked in the DOJ’s Antitrust Division from 1995 until 2007, said that the same antitrust triggers that attracted the DOJ’s attention four years ago would fire again. He also confirmed the Post’s report.
“I meant that if it [Yahoo] tried to resurrect the agreement, it would be investigated again,” Grunes said in an email. “And since the market conditions haven't changed much if at all, the outcome would likely be the same. In other words, if Yahoo went over to Google, it would be an invitation for a lawsuit.”
Grunes also noted that Google is battling its own antitrust investigation by the Federal Trade Commission, which Jon Leibowitz, the chairman of the commission, said it would like to settle by year’s end. Google already agreed to pay a record $22.5 million civil penalty to settle charges that it misrepresented to users of Apple’s Safari Internet browser that it would not place tracking “cookies” or serve targeted ads to those users, violating an earlier privacy settlement. And Google and Yahoo might attempt to wait out the FTC’s investigation until next year, when the RPS agreement expires.
According to Grunes, Google should instead choose to keep a low profile. “Google would be nuts to sign a deal with Yahoo in the middle of the FTC investigation,” he said. “But stranger things have happened. They usually do not end well, however.”