Yahoo sells out to Microsoft its most profitable business: search to Microsoft for free, in what may be the dumbest decisions Yahoo has ever made.

In case your not aware of what has been going on in the search engine space, Microsoft, who is in a distant third place to Google and Yahoo in terms of search market share, has struck a windfall deal with Yahoo whereby Microsoft's bing.com search engine will now power all of Yahoo's properties and main search engine for a period of 10 years. This deal came after the failed attempt to acquire Yahoo a year ago.

From an advertising perspective, which is Yahoo's primary method for generating revenues, this is a grave mistake, in that they are essentially giving away their most valuable resource to Microsoft for free. In addition, they are giving up their brand in the search space, and Microsoft will be handling all online ad sales via their own AdCenter ad sales department.

Over the last decade, Yahoo! has spent several billion dollars acquiring Overture/AltaVista, Inktomi, and AllTheWeb to help build up their search technology and presence where they are now the number two search engine in the world... And they sold it for $0!

Aaron Wall, an SEO expert, details the deal terms here.

Deal Terms
From Microsoft's press release:

• The term of the agreement is 10 years;
• Microsoft will acquire an exclusive 10 year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms;
• Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.
• Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process.
• Each company will maintain its own separate display advertising business and sales force.
• Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology.
• Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites.
• Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!’s O&O sites during the first 5 years of the agreement.
• Yahoo! will continue to syndicate its existing search affiliate partnerships.
• Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.
• At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.
• The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

Analysis

Why is this a bad deal for Yahoo and a great deal for Microsoft?

Online search is the most profitable segment of online advertising due to the fact that it provides the most direct means to connect prospective buyers who are actively searching for information about products and services to respective advertisers. Online portals, websites, and blogs pale in comparison when it comes to matching the value of an ad on a search engine from a search request. This is evidenced by much higher CPC (cost per click) revenues from search related ads to their banner ad counterparts from the average informational website. As a result, Yahoo is selling its most profitable business to Microsoft for nothing, destroying years of brand building, technological innovation, and wasted billions.

As a result, Yahoo will be left with its portal of websites, some of which are good, and some not so good with a new search engine that will not automatically support Yahoo's portal properties.

How does Yahoo search reinforce Yahoo's Portal properties?

Yahoo's search helped Yahoo's portal by reinforcing their own sites in the Yahoo search results. Under the new deal, these Yahoo portals will not automatically get the enhanced attention in their search results, which will mean less traffic overall to the Yahoo portal sites and a deterioration of the Yahoo brand.

My recommendation is to sell Yahoo if you own the stock it and don't look back.