Yahoo investors take fright at Microsoft search deal

Shares fall 12% as the two companies confirm details of a 10-year search ad alliance to take on Google.

Kevin Bowler, chief executive of Yahoo!Xtra (51% owned by Yahoo-Seven Media vehicle Yahoo7 and 49% by Telecom) was still coming to grips with the news this morning. Xtra was formerly aligned with Microsoft's local portal MSN.co.nz, before a quickie divorce in 2007 (MSN is now in bed with PBL). Now, some kind of rapprochement could be on the cards - or not. Yahoo has said the deal will not apply to all its properties - many of which, as in Australia and New Zealand, have local investment partners - but has yet to elaborate on its comment.

After noting it's early days, and the alliance faces many regulatory hurdles over many months, Mr Bowler told NBR, "It seems quite possible the deal will be extended to New Zealand - if other shareholders [Seven Media and Yahoo] agree it's in the interests of customers."

Mr Bowler already has his own take on the deal: "It will provide more effective competition against Google and that’s a good thing for customers."

At base, the deal, which comes after more than a year of negotiations, means that Yahoo will outsource its search-related advertising platform to Microsoft.

Microsoft’s recently relaunched search engine, Bing.com, will deliver ads over both companies search sites and portals, and those of affiliates. Yahoo will sell across both its own search engine and Microsoft's, and will get to keep a reported 88% of revenue for ads sold for its own site.

If approved by regulators (and an earlier effort by Yahoo to ally with Google was nixed after the latter got spooked by Department of Justice heat), the deal would kick in during 2010.

That means Yahoo will not see its first slice of revenue for at least two years as various stages of the complex search are phased in.

The deal does give Microsoft and Yahoo scale in their fight against Google for search eyeballs - important given that search ads are one of the only ways known to man to make money on the internet.

By Comscore’s count, Google has 65% of the US search market (in New Zealand, it’s above 90%) to Yahoo’s 20% and Microsoft’s 9% or so.

However, perhaps because Yahoo is perceived to be losing control of its destiny, or the yawning 24 months before any revenue is realised (let alone the "boatload of cash" Yahoo chief executive Carol Bartz had said would be needed to close the deal, raising expectations of an up-front payment), investors took fright at the deal.

Yahoo shares (NAS: YHOO) closed down 12.08% on the new.

Microsoft shares (NAS: MSFT) were up 1.41%

Google shares (NAS: GOOG) were down 0.82% in line with a broader market fall.