Ballmer: Yahoo deal baffles investors

 

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By Reuters

Posted on 31 Jul 2009 at 08:28

Microsoft's chief executive Steve Ballmer has expressed his surprise at Yahoo's 12% share slump in the wake of their search deal.

The ten-year deal sees Microsoft's Bing put to work powering Yahoo's searches. In exchange the software giant pays Yahoo 88% of revenue from advertisements generated on these sites.

In theory, that means Microsoft gets more traffic to refine its search technology and build up its ad base, while Yahoo gets revenue from search ads without the expense of managing its own search engine.

Shares of Yahoo slumped 12% when the deal was announced and dropped more than 3% on Thursday. Microsoft shares rose only slightly, puzzling CEO Steve Ballmer.

"I was myself kind of surprised by the market reaction," Ballmer told a meeting for financial analysts at Microsoft's headquarters near Seattle. "Nobody gets it. It's a little bit complicated. Nothing got sold and nothing got bought. It's a win-win deal from my perspective."

"On the Yahoo side - this is the one that stuns me that people haven't figured it out - Yahoo gets 88% of the search revenue they have today. They have zero percent COGS (cost of goods sold) and they have no R&D (research and development) expense and no ongoing capex (capital expenditure)," added Ballmer. "It's sort of unbelievable."

For Microsoft, he said the deal means it gets more traffic, enabling it to refine its search technology, which should lead to more interest from ad buyers and hence better prices for its ads.

"The more queries you see, the more you can tune your product. The more scale you have, the more advertisers advertise on your system, and the more relevant they make their ads for your users," said Ballmer. "Because we have more bidders in our advertising marketplace, we will get higher bid prices, probably, and more liquidity in the marketplace. That will improve monetisation."