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What’s Going On With Yahoo And Microsoft?

One thing seems clear. Yahoo is working on a turnaround in search. What is less clear is how big a role Microsoft will play in that.

Last month, when Yahoo released its earnings report for Q4 and the full year 2012, it included better than expected results, which were significantly helped by Yahoo’s search performance.

As you probably know, Yahoo and Microsoft entered a “Search Alliance” back in 2009, when Yahoo was under the leadership of Carol Bartz. The agreement was to last for ten years, and would see Bing powering the back end of Yahoo’s search, and Yahoo would become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Advertising for both companies would be run through Microsoft’s AdCenter platform, which has since become Bing Ads and the Yahoo Bing Network.

For that ten-year duration, Microsoft also acquired an exclusive license to Yahoo’s core search technologies along with the ability to integrate Yahoo’s search technologies into Bing.

It’s no surprise then, that Microsoft would want to make it incredibly hard for Yahoo to leave the partnership prematurely, if the company was inclined to do so. According to a new report from All Things D’s Kara Swisher, who has a proven track record of Yahoo insider information, sources at Microsoft say the company is “unlikely to extend the agreement without major concessions, and that any efforts to end the overall deal will be difficult for Yahoo.”

She quotes one of the sources as saying, “There is what [Yahoo] wants, and what’s possible.”

And leaving the Search Alliance early could very well be what Yahoo wants. Last week at an investors conference, Yahoo CEO (and former Googler) Marissa Mayer expressed her disappointment with the deal. Reuters quoted her:

“One of the points of the alliance is that we collectively want to grow share rather than just trading share with each other…”

“We need to see monetization working better because we know that it can and we’ve seen other competitors in the space illustrate how well it can work.”

We’ve heard of industry rumors that Yahoo would seek to kill the deal early for quite some time, but Yahoo seems to be getting increasingly vocal about the state of affairs, though it has not come right out and said it wishes to kill the deal.

Yahoo has, however, slammed Microsoft in other venues in recent memory.

Either way, Yahoo is prioritizing search more than it has in years, from the sound of it. On the earnings all, Mayer said as much. Here’s Wired’s account of her words:

“Overall in search, it’s a key area of investment for us,” Mayer said. “We need to invest in a lot of interface improvements. All of the innovations in search are going to happen at the user interface level moving forward and we need to invest in those features both on the desktop and on mobile and I think both ultimately will be key plays for us.”

“We have a big investment we want to make and a big push on search. We have lost some share in recent years and we’d like to regain some of that share and we have some ideas as to how.”

That does make it sound like Yahoo is more interested in focusing on the front end than on the back end, which really makes one name spring to mind as an alternative back-end partner, should Yahoo pursue an early end to the Microsoft partnership. And that’s a name that would give Microsoft all the more reason to make it as hard as possible for Yahoo to end it. It’s also a name that Mayer has very personal ties with. It’s also a name that Yahoo just announced a new display partnership with. (Hint: it rhymes with Yoogle).

Of course, Yahoo and Google wanted to partner in the first place, but the threat of regulatory action impeded any deal, so Yahoo settled for Microsoft. It’s hard to say whether the two would be able to get something done if they tried again, even if Yahoo is able to ditch Microsoft.

new report from Business Insider quotes some former Yahoo employees who seem quite sure that Yahoo wants Google as its search partner. One of them said this about Yahoo and Google’s display deal:

“Marissa certainly wants to move the search deal from Microsoft to Google… Maybe this is the first of a few chess moves.”

Business Insider’s Nicholas Carlson himself adds, “But one thing is clear: Yahoo’s deal with Microsoft is likely forcing it to accept lower revenue per search than a comparable deal with Google would. So Mayer would be crazy if she weren’t trying to either shift to Google or use Google as leverage to extract a better deal from Microsoft.”

But Yahoo will press on with its own search initiatives regardless of partners. According to Swisher’s report, Mayer has appointed long-time Yahoo exec Laurence Mann to head Yahoo Search.

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