Market Watch

Microsoft-Yahoo Search Alliance Completed in North America


Display Driver IC Forecast


Algorithmic (natural) search results and paid search results of Yahoo sites in US and Canada are now powered by Bing, the search engine technology of Microsoft, and sold through Microsoft's adCenter. This marks the completion of a first major milestone in the implementation of the global search advertising agreement between the two companies (see our commentary of 22 February 2010).

Yahoo hopes that the partnership will revive its search activity which has suffered from a strong revenue decline so far in 2010.

The combined shares of Yahoo and Microsoft in the US (explicit core search queries) stood at 28 per cent in October, according to Comscore, which was down from Q2 (30 per cent) and back to where it was a year ago. So far, Bing has grown at the expense of Yahoo and Google is left unchallenged.

However, it is too early to assess the impact of the alliance. In fact, the transition phase has arguably disrupted Yahoo's search activities.

In the third quarter of 2010, Yahoo's online marketing services revenues from owned and operated sites increased three per cent to $877m. Display advertising grew 17 per cent to $465m, in line with Q1 and Q2 (respectively 20% and 19%) and in line with the global market. Search advertising, by contrast, decreased by seven per cent to $331m, following drops of 14 per cent in Q1 and 8 per cent in Q2. In terms of geography, Yahoo revenues decreased in Americas and EMEA by respectively two and seven per cent, whilst they grew by 26 per cent in Asia Pacific, which represents 20 per cent of Yahoo's global revenues.

Analysis
The decrease of Yahoo's search revenues this year - in a global market that, we believe, will grow by 18 per cent on a full year basis - is due to three factors.

  • A decline in share of search. Yahoo has lost shares of queries this year to the rising Bing and Google has increased its leadership in many countries. Yahoo's search query volume in Q3 was flat year-on-year and quarter-on-quarter. Its share of search stood at an all-time low of 16.5 per cent in the US in October according to Comscore.
  • A decline in paid clicks. A paradoxical consequence of the back-end migration is that users experience more relevant results on Yahoo search pages powered by Microsoft, and therefore click more on organic results and less on sponsored links, according to Yahoo management.
  • Finally, a commercial disruption during the transition to Microsoft's adCenter for Paid Search campaigns. Some advertisers have decided to wait for the integration before resuming normal activity.

Meanwhile, Microsoft's Online Services Division (OSD) revenues grew eight per cent to $527m in 2010 Q3 (Microsoft's fiscal Q1).  Online advertising grew 13 per cent, primarily driven by Bing. The OSD division represents a mere three per cent of Microsoft's global revenues ($16bn in the quarter). Microsoft will see its search revenues increase further in the next few quarters, driven by the rise of Bing itself, from a low base, and by the additional search volume generated through Yahoo sites in North America. Microsoft will keep 12 per cent of Yahoo search revenues powered by Bing.

Earlier in the quarter, Microsoft and Facebook have deepened their own alliance in search. Bing now provides sponsored links on Facebook searches and Bing results will integrate 'social' results powered by Facebook. In the long term, the association of Bing with Facebook and its 500 million users is in our view a much bigger threat to Google's dominance than the Yahoo-Bing deal.

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