Yahoo’s search business seems like it’s hosed

CEO Marissa Mayer wants to break Yahoo's search deal with Microsoft, Amir Efrati at the Wall Street Journal reports.

Unfortunately for her, it's not happening, not until 2015 at the earliest, according to Efrati. A source tells him that Yahoo signed a 10-year search deal with Microsoft. It has an opt-out provision at the mid-point, which is 2015.

Danny Sullivan, who understands the nuts and bolts of the search business as well as anyone, took a look at Yahoo's search business yesterday. After reading his story, and Efrati's story, it sure sounds like Yahoo's search business is hosed unless Yahoo and Microsoft can significantly improve results.

Search revenue is still about half of Yahoo's overall revenue. Last quarter it was $409 million of Yahoo's $1.07 billion. So, Yahoo has to figure out how to improve its Microsoft-based search results.

When Yahoo did its deal with Microsoft, the companies agreed to a level of revenue per search (RPS) at Yahoo, says Sullivan. That RPS was at a certain, undisclosed fraction of Google's RPS. So, if Google got $1 of revenue for every query, Microsoft would help Yahoo get $0.50. (Those aren't the real numbers, they're just there for illustrative purposes.)

Yahoo has never quite hit the RPS targets.

Efrati reports that Yahoo's RPS "has been worse under the Microsoft deal than when it operated its own Web-search technology and advertising system."

In other words, when Yahoo totally controlled its own ad tech and sales system it was generating more revenue.

As a result, Yahoo is exploring how it can get out of its deal with Microsoft, so it can generate more revenue.

The problem is that while the RPS is not good, it's not completely horrendous. Efrati says Yahoo's RPS has to fall below a certain threshold in order for it to walk away from its Microsoft deal. It has not yet fallen that low.

Efrati says Yahoo has been talking to Google, which thinks it can get Yahoo more revenue per search. But, Yahoo tried to strike a deal with Google in the past and it was knocked down by the U.S. government.

If Yahoo were able to somehow break away from Microsoft to go with Google, it would be high-risk. Yahoo would alienate Microsoft, while hoping for the government to be okay with Google controlling over 80% of the U.S. search market.

Danny Sullivan says, "Yahoo has no substantial web search technology left." So, if it drops Microsoft to go to Google, it's stuck with almost no search or ad serving technology, while it waits for government approval.

The bottom line seems to be that Yahoo's search business is pretty much hosed unless Microsoft and Yahoo can work together to improve the product.

Yahoo gave up on search technology, and now it's 100% reliant on Microsoft. It has to figure out how to improve RPS with Microsoft, because going to Google is non-option.

Mayer tacitly acknowledged this yesterday at the Wired Business Conference, saying, "most of the innovation on search will happen in terms of the user interface."

Yahoo has to improve the front-end of its search and get users excited about its search engine, even if its powered by Bing.

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