Thursday, August 6, 2009

Microsoft's Sweet Deal for Yahoo! Search Businesses: WYSIWYG for SLA's

Five days after announcing the deal for licensing of Yahoo’s search technology in return for Microsoft’s commitment to manage the search functions for Yahoo!, on August 4, 2009, Yahoo! revealed the details of the Microsoft-Yahoo! agreement to enter into a definitive “global Search and Advertising Services and Sales Agreement.”

The details are not very pretty for Yahoo! as an outsourcing customer of back office support for its core business of Internet search services.

Maybe something is better than nothing. Yahoo! was essentially not saleable at any price due to the 65% market share of Google, Yahoo!’s smaller market share and the financial strengths of Google and Microsoft to make future technology investments.

As an “outsourcing” deal, there are some key issues, including termination contingencies and Service Level Agreements (SLA’s). Yahoo! is very exposed on each of these key performance indicators (KPI). It gets what Microsoft delivers, WYSIWYG. It has the flavor of a divestiture, not an outsourcing.

Scope. Microsoft will take over R&D expenses for improving the Yahoo! search engine. Microsoft’s role is limited to website technology for Internet websites, applications and other online digital properties designed for use and consumption on personal computers. If Yahoo! wants, it can implement Microsoft mobile search and mapping services, either exclusively or non-exclusively (though the financial terms were not disclosed). Yahoo! will be the exclusive worldwide sales force for the “premium search advertisers” of both parties.

Transition Costs. Microsoft is paying $50 million for each of the first three years to assists Yahoo! in paying Yahoo!’s transition costs. This looks like a payment for the value of the 400 IT staff that Microsoft is rebadging from Yahoo!.

Transition Plan: “WYGIWYG”. The transition is scheduled to compete within two years after the “Commencement Date.” Most outsourcing deals have much tighter schedules. New “best practices”: “What you get is what you get.”

Termination Contingencies.

Shotgun Marriage – Arbitrators to the Rescue? There is “no deal” if the parties cannot reach
definitive agreement by October 27, 2009 (about 90 days after the deal was reached). But
that does not matter. The parties adopted a binding arbitration process to choose, without
any modification, one party or the other’s proposed contracts. They agree to sign the
contracts within 3 days of the panel’s ruling, but they leave some room “to resolve potential
inconsistencies” in the final deal terms.
Regulatory Approvals. Microsoft agreed to use its “best efforts” (a high standard of care,
including moving mountains to get there) to get regulatory approvals, including
commitments to restrictions on its own activities in “search and paid search.” If Microsoft
fails, Microsoft must defend antitrust enforcement action, though it’s unclear when it can
Shotgun Marriage – Risk of “Annulment” due to Possible Misrepresentations. Either party
can escape the deal by declaring that the other is in material breach of its representations.
However, without “Definitive Agreements” being signed, no one knows what those
representations are.
12 or 18 Month Window to Get Started. The deal dies if “the conditions to commencement
have not been satisfied by July 29, 2010. If Yahoo! wishes, it may extend this window by
another 6 months. In short, Microsoft insisted on the right to walk away in 18 months if the
deal has any loose ends.

WYSIWYG Service Level Agreements. The Microsoft Windows® operating system became dominate because it allowed users to see formatting. Well, in this deal, the SLA’s for R&D are nothing other than whatever Microsoft does for itself, in Microsoft’s own format. Also, “Microsoft will not treat Yahoo! or Yahoo!’s Syndication Partners less favorably than Microsoft and Microsoft’s partners in connection with its delivery and operation of the services.

Such non-SLA’s are common in the sale of a business unit, where the selling parent company agrees to manage the administrative back office functions of the spun-off or divested subsidiary for a year. This “non-SLA” is useful to prevent unfair or discriminatory treatment, but does nothing to ensure competitiveness, continuous improvement, minimum features or other metrics of quality.

So, it’s not a classic outsourcing deal with classic SLA’s and the customary clauses giving flexibility in termination, scope change, adaptation to the market. It’s an exit plan with a hope to compete against Google! Yahoo! is hoping Microsoft will rescue it from further decline, and it represents the best alternative to simply exiting the market that requires further investment and faces heavy competition from Google!

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