Poor Yahoo?

CNET Asia blogger, Nicholas Aaron Khoo contributes his thoughts on the latest announcement of the Microsoft-Yahoo search deal.

Nicholas writes:

The popcorn and chips have run out, the Coke’s gone flat, and most of us have long fallen asleep snoring on the couch, with the show and lights still on. And finally they announced that the much-awaited deal between Yahoo! and Microsoft is done.

This geek wakes up to take a look at the announcement, a joint venture (JV) missing the promised “boatloads of cash” as compared to the US$44.6 billion offer that got the show started? Yawn. Maybe it’s time to turn off the Google box and climb into bed.

Sorry, to be politically correct, maybe I should have said “Bing box” now that Microsoft has managed to bag the princess without paying for the expensive upfront dowry. Heck, it looks like the company doesn’t even have to pay for the royal procession. But a JV is still a marriage, no doubt.

Ten years of exclusive license to Yahoo’s core search capabilities and no upfront payment? What a steal! It’s better than robbing the national treasury. I’m no expert on search or anything close to that, but there’s gotta be something underneath the hood they’re not telling us. Maybe it’s their secret ploy to keep us glued to the screen. Why would Yahoo agree to marry Microsoft and hand over the keys to the royal vault without even a cent in the dowry? Maybe Yahoo didn’t have much choice after the pretty big buzz around the launch of Bing. Or maybe it still hopes that this is just the beginning and Microsoft will make Yahoo a nice offer after they have been married a couple of years and Microsoft can’t live without somebody to do the household chores?

Or maybe, secretly, Yahoo’s thinking it can divorce later on for half of the assets? That’ll be a pretty decent prize! Maybe the princess is broke from the global recession and she needs help to maintain her royal lifestyle? Or just maybe, the deal itself would make Yahoo a rich and contented princess for the rest of her life with just the revenue split?

According to the TechCrunch story:

Microsoft will pay traffic acquisition costs to Yahoo at an initial rate of 88 percent of search revenue generated on Yahoo’s owned and operated sites during the first five years of the agreement, and guarantee revenue per search in each country for the first 18 months following initial implementation in that country. This is huge, and it shows Redmond will continue to chase after the heart of Google, no matter how much money it takes. After those 18 months and five-year periods, it’s unclear what will happen. Important to note is that Yahoo will continue to syndicate its existing search affiliate partnerships.

The company (Yahoo) estimates–based on current levels of revenue and operating expenses–that the agreement will provide a benefit to annual GAAP operating income of approximately US$500 million and capital expenditure savings of approximately US$200 million. Yahoo also reckons that this agreement will provide a benefit to annual operating cashflow of approximately US$275 million, something it sorely needs and which shareholders will be very happy about if it checks out eventually.

So Yahoo gets some nice revenue numbers, but now it looks like a billion-dollar buyout offer from Microsoft will never be on the table again, since it now has unlimited access for 10 years. Given the current economic situation, Yahoo probably had limited space to maneuver and made the best decision it possibly could, given the circumstances.

Here’s the boring part: