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Steve Ballmer has been telling partners and investors to man up on search and advertising, saying people "didn't get" Microsoft's online deal with Yahoo!.

Now, it's become clear why Microsoft's chief executive is so bullish.

Ballmer is selling a deal that ties Microsoft to some tough deliverables, which will see Microsoft lose money in the short term and will measure success against one single yard-stick: Google.

Yahoo! latest Stock Exchange Commission (SEC) filing reveals that Microsoft has committed to hit a set of pre-agreed revenue per search numbers in the US that are based on a percentage of Google's own estimated RPS. The actual numbers have not been released.

Should Microsoft fail, then Yahoo! has the right to terminate the agreement.

That's a huge statement of confidence in Microsoft's Bing and AdCenter, which will provide the search engine and serve ads for Yahoo!'s own sites and its syndicated properties. But Bing and AdCenter are relatively new. Will they really pull in the hits?

Ballmer has committed Microsoft to some serious lack of revenue realization opportunities under the proposed deal. Microsoft will pay Yahoo! $50m each year for the first three years of the 10-year deal, while Yahoo will claim 88 per cent of the net revenues generated by Bing and AdCenter. If Microsoft decides it doesn't want Yahoo!'s to keep selling the joint offering after five years, then Yahoo!'s share of revenue will shoot up to 93 per cent.

That's money that might have gone towards Microsoft covering its costs on Yahoo!. The company expects to lose $300m in the first two years of the deal according to a leaked Ballmer slide from last week's Financial Analyst Meeting (FAM) obtained by Seattle Times here and here.

Furthermore, Microsoft must commit to taking on at least 400 Yahoo! employees - most likely engineers to help the technical transition - at a time when it's trying to cut costs. Those people are likely amount to $90m in "retention costs," according to Ballmer's lost slide. Yahoo! engineers would help with the implementation of Bing and AdCenter on Yahoo! properties in a period Yahoo! said is expected to take no more than 24 months.

These business costs excludes an additional $2bn, from of an $9.5 R&D budget, going into Microsoft's online activities.

Clearly, Microsoft thinks that Bing is already as good as Google and that its past search problems were all about branding - not the technology. Microsoft believes that if you change the label on the tin, people will be happy with the meal they eat and won't care about the ingredients. If Microsoft can fit into Yahoo!'s cloths, it believes, then the rest is just a matter of time.

It's the same Pepsi taste-test-challenge thinking inside Microsoft that produced the Mojave Experiment to hoodwink people into liking Windows Vista last year.

Qi Lu, the president of Microsoft's online services division, articulated this thinking at last week's FAM.

"We have seen plenty of studies whereby you put the Google brand on top of a search result provided by another search engine-versus the other way around, where you put the Google search results underneath, put the different brand on top of search results. People will prefer the Google brand because of the strength it has," he said.

Microsoft believes Bing can - given time - acquire drip-drip mindshare and hit the same cultural status as Google. Microsoft will judge Bing has arrived when it becomes a verb, like Google. Lu told FAM: "We are already seeing initial anecdotal evidence that people are using 'Bing' as a verb."

Unfortunately for Lu, most of his audience wouldn't know - or care - what a verb was unless it fitted into a financial model and delivered a good rate of return.

Ballmer has given himself plenty of time for the brand-versus-technology theory to play out. The Yahoo! deal will last for a decade, should it receive regulatory approval from various governments.

In the meantime, it's extremely unlikely Yahoo will want to terminate the deal should Microsoft not make the numbers against Google. Detachment from Microsoft will become harder for Yahoo! as the relationship progresses in the next 10 years, and Yahoo! increasingly relies on Bing and AdCenter online and stops its own investments in search and advertising.

Bootnote

Privacy activists and some US politicians are concerned about the anti-trust and competitive ramifications of Microsoft's deal with Yahoo!. Attention has focused on the idea that two big companies combined could exploit users' data at the expense of their privacy rights. Consumer Watchdog said users must have control of their data - whether it is collected and how it is use

Now, it seems, data gathered by Bing and AcCenter will be handed over to Yahoo! and come under the terms and conditions of Yahoo!'s privacy policy. The company said in its SEC filing: "Microsoft will provide Yahoo! all data it collects as a result of its implementation of the services on Yahoo! properties and syndication properties and, subject to Yahoo!'s privacy." ®

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