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How the Microsoft search deal is reshaping Yahoo’s business, for better or worse

How the Microsoft search deal is reshaping Yahoo’s business, for better or worseYahoo at the moment reported fourth-quarter profits that met Wall Avenue’s comparatively modest expectations, however the numbers additionally present how Yahoo’s 2009 search settlement with Microsoft is altering the monetary image for the Sunnyvale, Calif., firm — and the way unsure the long-term consequence stays.

How the Microsoft search deal is reshaping Yahoo’s business, for better or worseThe background: Underneath the settlement, Microsoft operates the underlying search and search promoting expertise for each firms, and will get 12 p.c of the search income generated by Yahoo properties and affiliate websites in locations the place the partnership has taken impact, after accounting for the price of buying visitors.

The Yahoo chart above, taken from its presentation to investors today, exhibits how that income sharing has impacted the firm financially over the previous 12 months. Yahoo’s 2011 annual income was $4.38 billion, down 5 p.c, and Yahoo stated at the moment that the lower was “primarily resulting from the income share associated to the Search Settlement with Microsoft.”

Why would Yahoo hand over such an enormous slice of its enterprise? The long-term wager, positioned by former Yahoo CEO Carol Bartz, is that the firm will be capable to cut back its bills by handing over the underlying search expertise to Microsoft, whereas nonetheless innovating on the consumer expertise and attracting extra customers to its search engine.

Reflecting that objective, Microsoft is reimbursing Yahoo for search working bills throughout the transition. These reimbursements to Yahoo totaled $48 million in the fourth quarter, however they may decline over time.

Collectively, Microsoft and Yahoo are betting that they may be capable to compete extra successfully towards Google and thereby develop their total income greater than both may by itself.

So how’s it going? It’s nonetheless early in the 10-year deal, however as one indication, Yahoo’s search income was down 3 p.c, to $376 million, in the fourth quarter.

On the constructive aspect, the decline wasn’t as a lot as the double-digit decreases in Yahoo’s search income in quarters previous. And Yahoo was in a position to cut back its total product improvement bills by about $77 million in 2011, to simply over $1 billion.

Nonetheless, the latest search stats aren’t promising for Yahoo, displaying the firm slipping to the No. 3 spot in U.S. market share, with 14.5 p.c, for the first time coming in behind Microsoft Bing, which is now at 15.1 p.c.

In the meantime, Google continues to develop, with almost 66 p.c of the U.S. market.

One other complication: Microsoft’s adCenter expertise hasn’t been producing as a lot income for Yahoo as anticipated. That beforehand prompted Microsoft to increase, for an additional 12 months, the revenue guarantees it provided Yahoo under the deal. These ensures are actually slated to run out in March 2013 in the U.S. and Canada.

On the different aspect of the partnership, Microsoft’s On-line Companies Division posted a quarterly loss of $458 million last week — nonetheless deeply in the crimson, but additionally an 18 p.c enchancment over the $559 million loss posted in the identical quarter the earlier 12 months. Microsoft credited elements together with the development of Bing and the rollout of its Yahoo partnership.

New Yahoo CEO Scott Thompson has so much on his plate, making an attempt to reverse the fortunes of an growing old Web icon, and it’s laborious to think about this Microsoft deal being simple for him to swallow.

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