Yahoo, Microsoft’s Bing join forces to challenge Google

Just two years ago, Yahoo Inc. spent $79 million to rebuff a hostile takeover from Microsoft Corp. and preserve its independence. Now, a big part of Yahoo’s future prosperity depends on how well it can join arms with Microsoft on a high-risk, high-reward technical project.

Yahoo and Microsoft are racing to meet a fall deadline for launching their joint venture to collaborate on Internet search, an effort by the former rivals to narrow the gap with their much stronger common foe: Google Inc.

The effort — including the retraining of hundreds of Yahoo sales people to sell ads for both companies, and a conga line of about 400 engineers who are relocating from Yahoo to Microsoft offices in Burbank; Silicon Valley; Redmond, Wash.; and Bangalore, India — needs to be done by mid-October if the two companies hope to have the show up and running before the holiday season, the make-or-break period for advertisers and publishers.

At stake in the joint venture, Yahoo executives say, is the company’s ability to become an innovative force in search again — something Yahoo acknowledges it can no longer afford without its partnership with Microsoft’s Bing search engine. The 10-year partnership has Bing providing the underlying results of Yahoo searches, while Yahoo retains control for how those results are displayed.

But outside observers say more than just Yahoo’s reputation in search is at stake. Considering the revenue and traffic represented by Yahoo’s 3.1 billion U.S. search queries each month, the partnership represents a gamble by new Chief Executive Carol Bartz to grab a bigger piece of the search-revenue pie. In the first half of 2010, Yahoo’s search ad revenue declined to $674 million — down 11%, or $84 million from a year earlier, even though the economy improved. Bartz and Microsoft CEO Steve Ballmer have made the search transition a top priority for both companies, executives say.

“There is a tremendous amount at stake here, for both players,” said Laxmi Poruri, an analyst with Primary Global Research. “There are search engine advertisers out there who are eager for this. They want to spend more money on Yahoo and Bing. The problem is these guys [individually] aren’t getting enough traffic for them.”

If the companies miss the mid-October deadline, they say they will have to delay the switch in the U.S. and Canada until 2011, sacrificing the lucrative holiday advertising season. But Poruri said Yahoo also is under pressure in the long run to continue to generate search traffic for Bing. “If the technology is a disappointment or the traffic acquisition is a disappointment, then Microsoft will go somewhere else to get that traffic,” Poruri said.

Microsoft and Yahoo executives say the switchover is going as well as could be expected, and Yahoo says that all of its search traffic, apart from paid search, could be powered by Bing as soon as the end of the month. Still, Mark Morrissey, the Yahoo senior vice president in charge of the company’s transition team, said engineers are sometimes pulling 48- to 72-hour shifts to hit key milestones.

“I can tell you, far and away, this is the most complex logistical and technical thing I have ever been a part of,” said Morrissey, who also handled Yahoo’s switch to new systems for its paid search ads and display ads.

“All our day jobs are really that, at this point,” said Satya Nadella, senior vice president of Microsoft’s online services division.

The Yahoo-Microsoft alliance has become increasingly necessary because of Google’s dominance. Google now provides about two-thirds of U.S. Internet searches, and an even higher share in many other countries.

Under the collaboration, Yahoo gets 88% of the revenue from searches done from Yahoo sites over the first five years, while saving the heavy costs of the computer infrastructure needed to crawl, index and rank the Internet. Microsoft gets the still-significant search traffic flowing through Yahoo. That is valuable because the more queries a search engine processes, the more relevant its answers and the more extensive variety of keywords it can sell to advertisers.

Microsoft’s costs for Bing have been huge. Its online services division, which includes Bing and MSN, reported a $2.36-billion loss in fiscal 2010, which ended June 30.

Yahoo says its long-term ability to build innovative search products hinges on the collaboration.

“It’s not about the transition,” Morrissey said. “It’s about the future of search, and where we want to go.”

With Yahoo’s share of U.S. searches dipping below 20% in recent years, few see the company as a search leader anymore. But Shashi Seth, Yahoo’s new chief of search, says that is about to change. Seth says the collaboration with Microsoft will give Yahoo the resources to develop new kinds of search products that could mimic the serendipity of browsing a newspaper — a sense of surprise and discovery rarely found in the blue hyperlinks of a conventional search query.

One example, Seth says, are Yahoo’s plans to offer the “Trending Now” box on its homepage to other websites, probably in the next two or three months. Yahoo updates the Trending Now box every few hours based on an analysis of its search traffic, but the featured topics are tailored to users based on geographic location and Web history, so different users see different trending topics.

“The goal is to get users to discover things that they never would have thought about,” said Seth, a former Google executive who arrived at Yahoo in February. “It’s a completely new kind of search experience, one where the user didn’t ask for anything.”

Others are also racing to offer new ways for people to search. Facebook Inc. and recently introduced new “social search” features for users to ask questions of actual people, rather than just query a computer algorithm.

“We think as the social Web continues to explode, this is only going to get bigger and bigger,” said Scott Garell, president of Oakland-based Ask Networks.

Some at Yahoo have been frustrated with the more centralized and hierarchical management structure at Microsoft. But despite their history as hostile competitors — Yahoo disclosed that it spent $79 million in 2008 on lawyers and “outside advisers” to respond to Microsoft’s unsolicited takeover bid — executives say the main challenge is the technical difficulty of the project.

“We’re mutually codependent,” Morrissey said, “on each other’s success.”

Swift writes for the San Jose Mercury News/McClatchy.