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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." ®
COMMENTS
Try Bing before you disparage it??
The article is a bit unfair to Bing, It does contain some significant new technology. The quality of search results has improved and it does have the feature of streaming image results. So... if your looking for an image you will find Bing much better than Google.
Bing is already as good as Google? Hilarious!
I have no idea how Bing does page ranking, but it's not just a joke... it appears to be non-existent.
I searched Bing for my full name in quotes to see what would come up.
First hit, a page on patents.com that describes a patent I have. Not what I'd consider #1, but still okay. Second hit is a web page with my bio for my current job. No problem with that.
The third hit is a link to a web page that used to be my work web page at a job I had 7 years ago. Because it was my page, my last name appears in the URL. But because I no longer work in that organization, the web page no longer exists and redirects to the organization's main page. Neither my first name or last name appear anywhere on that web page. Perhaps that organization main page has a high page ranking, but how can Bing rate that hit high on the list for my name if my name does not appear anywhere on that page. Notwithstanding that it may be a highly ranked page, it shouldn't be a strong hit for a search using my name as the search string.
Next hit is a DBLP Bibliography Server incomplete list of publications of mine. A data-centric page with very little actual text. Anyone looking for me or info about me would probably find this page not very useful.
Of the next five hits after that, for are for talks/presentations I give between the years 2002 and 2004. I've given numerous public talks in the five years since then. Apparently Bing does not use the presence of dates to infer age of a page, or doesn't use that info to make more recent pages more relevant in page ranking.
Google results are completely different, far more relevant in terms of providing more useful info about me, and appearing to infer that pages associated with me involving activities from the past couple of years are more relevant than pages from years ago.
I have no brand loyalty. I use Google because it works. Bing simply does not work very well when it comes to relevance. (I've tried it a few other times, not just to search for myself.) I know it's a work in progress, and I wish them luck in making improvements because I believe that good competition is good for everyone. But Microsoft is definitely still way off on the horizon in this catch-up game.
-S
Marketing...
Marketing made up very nicely for the shortfall in MS's core business of desktop operating systems and office productivity software --- why shouldn't they believe that it will this time, too?
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