Yahoo Could Do Search Because It Needs The Money

Yahoo could be getting back into the search game. Its long-suffering deal with Microsoft has underperformed, making recent revelations that the company is working on building new search products hardly surprising.

If the projects are serious — meaning they are more than experiments or attempts at leverage for the coming discussion it will have with Microsoft on per-search revenue — Yahoo could be working to create a product that will replace nearly one-third of its current revenue.

In its calendar third quarter of last year, Yahoo earned 31 percent of its total revenue from the search deal with Microsoft.

As a percentage of its revenue, the Bing search deal is of growing importance to Yahoo. For the nine months ending last September 30, 30 percent of the company’s revenue came from the deal, or slightly less over the nine-quarter period than the last quarter reported.

More dramatically, its 2012 third quarter — comparable to the 31 percent number — saw 27 percent of its revenue come from the Microsoft deal. And in the nine-month period ending with the third quarter of 2012, Yahoo earned a more modest 24 percent of its top line from Microsoft.

So, 24 to 27 to 30 to 31 percent. That’s a steady progression.

What is driving that momentum, given that Yahoo is consistently losing search market share? I’d estimate that its other revenues, which are declining, are doing so more quickly than income from the Microsoft deal. Recall that Microsoft last year re-upped its revenue guarantee with Yahoo in regards to its search agreement for the U.S.

Financially, therefore, the Microsoft deal is something of a boon for Yahoo, providing revenue stability in a time of transition for the latter company.

That’s the nice way to put it. In reality, Yahoo needs that firehose of Redmond dollars to cover for it as it uses future Alibaba money to (hopefully) buy revenue momentum. So far that isn’t working, as we recently saw.

And Yahoo may be working to cut this income flow and forge a new path for itself. You could call that bold. But there is a fine line between boldness and overzealousness (leadership, you could argue, lies in between).

Microsoft and Yahoo both declined to comment for this story.

While that may be the case, it’s worth keeping in mind that Yahoo has old search chops, Mayer is brilliant, and the company is on a decent personnel footing. It could pull off a transition back to search. And, perhaps, Yahoo could deploy enough of that Alibaba cash to snag a few Googlers to pull the operation together.

Yahoo was said to complain last year that revenue per search was actually worse with Microsoft under the agreement than it had been when the company used its own technology. That’s a point in favor of Yahoo trying again. The company may be able to opt out of the deal in mid 2015.

But search, as the saying goes, is hard. Microsoft, a company with a few good heads in it, has spent years — and billions — building Bing. 

And despite that work and treasure, Bing has yet to mature to the point in which Yahoo and Microsoft didn’t need the search revenue guarantee. That means that Bing was monetizing at below the set threshold, forcing Microsoft to fork over more cash to keep Sunnyvale on board.

So, after billions and years, Microsoft’s search technology still isn’t so good at making money.

For Yahoo, that’s the mission at the moment. It needs to grow its revenue. And, at this precise moment, it appears that the company is moving instead to replace a stable, and likely renewable revenue stream.

Top Image Credit: Flickr (Image cropped)