Yahoo Search Ad Deal With Microsoft “Down to the Short Strokes”–But Caution Also Advised

by Kara Swisher
Posted on July 16, 2009 at 7:49 PM PT

Unless there is some major glitch, there might finally be a search and online advertising deal struck between Yahoo and Microsoft at long last.

Top executives at Microsoft–including SVP of the Online Audience Business Group Yusuf Mehdi, search head Satya Nadella and top digital exec Qi Lu, as well as others–have all flown down to Silicon Valley from their Redmond, Wash., HQ today to iron out the remaining issues, which seem to have to do with the deployment of technology.

“It is an entourage,” joked one exec.

Microsoft CEO Steve Ballmer is also deeply involved in the talks, although he is not with the group.

If all goes well, the deal could be announced within the next week, sources at both companies said.

The most recent talks have been unusually close to the vest at both companies, and spokespeople for both Yahoo (YHOO) and Microsoft (MSFT) declined to comment on the issue.

And, of course, they should not, since there is no certainty any deal will be struck at all, especially since the pair have been down this road before, unsuccessfully.

In those cases, both sides have thought they were close, too, with fingers quickly pointing at each other for the failure of the discussions.

While BoomTown has gotten several different versions of terms of the latest deal, they all include Microsoft (MSFT) paying Yahoo (YHOO) several billion dollars upfront to take over its search advertising business and guarantee certain payments back to Yahoo.

There is also a display advertising element to the deal, which would likely have Yahoo take the lead in selling premium advertising for the companies.

That they are so close is a good sign, although sources on both sides of the deal cautioned that it could just as easily come apart.

And, indeed, Microsoft and Yahoo have long argued the particulars of this deal, including over the rate for traffic-acquisition costs, the ability of Yahoo to have control over data and the simple fact that such an arrangement is exceedingly complex.

But, said one person close to the situation, “It is down to the short strokes, for sure, it is just a question if we can finally close this.”

That’s a good question, given the push-me-pull-you relationship between Yahoo and Microsoft over the last two years.

But both need each other, especially since they lag so far behind search market leader Google (GOOG).

Yahoo was even ready to strike a similar deal with Google in the midst of Microsoft’s hostile takeover attempt last year. That partnership failed due to regulatory concerns.

Talks between Microsoft and Yahoo have waxed and waned too, as I reported earlier this week.

When last we checked in, Yahoo CEO Carol Bartz and Microsoft’s Ballmer had a little private tete-a-tete about the deal, when both were attending the seventh D: All Things Digital conference in Southern California in late May.

Bartz and Ballmer also both acknowledged discussions in onstage interviews at D7, with Bartz even boldly stating that she was open to the deal if good and reliable data and “big boatloads of money” were forthcoming from Ballmer.

(You can see the video of her saying that here, while Ballmer is less colorful here.)

Since then, Microsoft did an aggressive launch of its new Bing search service, which has been an initial success.

The company has become more confident with the early success of Bing, which has garnered good reviews and small improvements in market share in surveys.

Sources at the software giant maintain that the improvement–via innovation and a huge marketing spend–has given Microsoft a bit of leverage against Yahoo, although the bets are still out on exactly how much sustained share Bing can garner.

Yahoo is aware, of course, that is can ill afford to lose search market share, although Bartz has been focused on beefing up Yahoo management and marketing.

Still, the companies have never given up on the talks, which began in March, although all the back and forth underscores a very real debate by both sides about whether joining together will benefit them both or not.

The possible pluses are clear: Huge technology cost-savings and cash for Yahoo and another weapon to fight archrival Google for Microsoft.

It needs as much firepower as it can get. A recent comScore (SCOR) report for June showed Google with a 65 percent share, Yahoo at 19.5 percent and Microsoft at just 8.4 percent.

The deal, if struck, could give a big boost to shares of both companies, which have been up a lot since the beginning of the year.

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