Appropriately top Microsoft executives, coming off  the “worst year ever” for the company, are sharing some of the pain. As PaidContent reports, the top executives at the company took a compensation hit based on the sales and revenue declines. Here are some of the numbers:

• CEO Steve Ballmer $1.265 million vs. $1.34 million a year ago
• CFO Chris Liddell: $3.5 million vs. $4.8 million
• COO Kevin Turner: $5.4 million vs. $8.6 million
• Entertainment and Devices President Robbie Bach: $6.2 million vs. $8.3 million

The snark impulse is pretty strong and I’m trying not to write something very sarcastic about struggling to get by on $3.5 million — but I won’t.

This is appropriate action for the company at a time of underperformance. If you really want to dig into these salary figures you can read the SEC filing (page 16).

eBay has announced they have hired Dr. Eric Brill as their vice president of research and applied science to lead up eBay’s research labs team. Prior, Dr. Brill was General Manager of adCenter Labs at Microsoft and before that, he Director and Principal Researcher and head of the Text Mining, Search and Navigation Group at Microsoft Research.

Microsoft has quietly pulled his bio page but Google still has a cached version.

“Search is all about predictions, highly educated guesses about what people really mean when they type in a word like Diesel or a phrase like ‘red, white and blue’,” said Mark Carges, eBay’s CTO and SVP of Marketplaces Product. “Eric’s expertise in natural language processing and data mining is a huge asset as we continue to improve our ability to determine customer intent and get the right products in front of the right buyer at exactly the right moment.”

Ten days ago, we reported that Antonio Gulli left Ask.com after 4 years heading up their technology team in the European R&D center. Gulli announced his new plans are to continue in search, but switch ships and work for Microsoft Bing.

Gulli said he will be “leading all the engineering development for UX and verticals in Europe,” focusing on Microsoft Bing’s search technology and user interface. He will be working at Microsoft’s London site of STC Europe nearby Carnaby Street.

What I found most interesting about his announcement post was that he, in not so many words, explained that he now has the resources needed to make a difference in search. The way I read it was that he felt that at Ask.com, he didn’t have enough resources to accomplish his goals. Gulli said that at Microsoft “you get the resources to experiment with it.”"Search is all about continuous improvements and evolutions, isn’t it?” Gulli added.

Congrats on the new job Antonio, it seems like you will be happy at Microsoft.

The NY Times offers an extensive and flattering profile of the former Yahoo EVP Qi Lu who, in January, 2009 was named president of online services for Microsoft. Lu was deemed an unlikely appointment by some given his background not as a business and advertising executive but rather as an engineer. However, he was apparently instrumental in helping facilitate the Yahoo-Microsoft search deal.

One of the striking things about the article is the uniform praise Lu receives from former Yahoo colleages and Google’s Udi Manber: “He is probably the best competition I can have.” The other is Lu’s devotion to his work:

He sleeps three to four hours a night. One most weekdays, he wakes up around 4 a.m., goes through his e-mail and runs four miles on a treadmill while listening to classical music or watching the news.

He prefers to be in his office between 5 and 6 a.m. to have uninterrupted time to prepare for his day. He is often sending e-mail to his staff until midnight or later. (Mr. Lu, who is married and has two daughters, reserves much of the weekend to spend with his family.)

(As a personal, editorial aside I would submit that while Mr. Lu is to be admired for his loyalty and devotion to his work, I hope Microsoft isn’t setting his work habits up as a model for others to emulate.)

Reportedly Lu sees his work at Microsoft as an opportunity to continue a mission in search he began at Yahoo. While the cultures of Yahoo and Microsoft are different, perhaps the most important difference at Microsoft is that Lu and his team have far more resources to bring to bear on search than he did previously.

The division Lu heads up, which houses search and online advertising, is a strategic but money losing business unit for Microsoft. No doubt Lu is under some pressure to improve the performance of that group and would ultimately be held accountable if it does not.

For its part, Bing is off to a solid start. That fact and the Yahoo deal offers Microsoft the best chance it’s had in years to make a competitive run at Google.

I blogged the keynote interview with Lu from SMX Advanced in June of this year.

First to pounce on the SEC 8-K filing by Yahoo was PaidContent, which provides an extensive bulleted list of many of the deal terms not revealed last week during the frenzy of conference calls and articles that followed the official announcement of the Microsoft-Yahoo search deal. CNET also writes about selected aspects of the deal contained in the filing, specifically an “escape clause” (termination) for Yahoo (see below). And the AP has a short piece on how the deal terms require Microsoft to hire at least 400 Yahoo employees.

Here are some verbatim excerpts from the SEC filing:

Negotiation and Execution of the Definitive Agreements

Pursuant to the terms of the Letter Agreement, the parties will negotiate and execute the Definitive Agreements as soon as practicable but in any event by October 27, 2009 (the “Negotiation Period”). If the Definitive Agreements are not executed during the Negotiation Period, the parties will submit any disputes regarding the final terms of the Definitive Agreements to an arbitration panel.

Conditions to Commencement and Termination Prior to Commencement

Prior to the Commencement Date, the Letter Agreement and Definitive Agreements may be terminated only by (a) mutual consent, (b) if a breach renders a condition incapable of being satisfied by the Termination Date (as defined below), or (c) if the conditions to commencement have not been satisfied by July 29, 2010 (the “Termination Date”); provided that Yahoo!, in its sole discretion, has the right to extend the Termination Date by six (6) months if the required antitrust approvals have not yet been obtained.

Search and Advertising Services and Sales Agreement

For a period of ten (10) years beginning on the Commencement Date (the “Term”), Microsoft will be Yahoo!’s exclusive technology provider for algorithmic and paid search services and Microsoft will provide contextual advertising to Yahoo! on a non-exclusive basis. Yahoo! will be the exclusive worldwide relationship sales force for Yahoo!’s and Microsoft’s premium search advertisers.

The services provided by Microsoft under the Search Agreement will be provided on all web sites, applications and other online digital properties owned or operated by or on behalf of (a) Yahoo!, Yahoo! subsidiaries and Yahoo! joint venture relationships, as well as on software applications developed or distributed by Yahoo! or Yahoo! subsidiaries that provide access to or enable algorithmic search services or paid search services (“Yahoo! Properties”) and (b) Yahoo! Syndication Partners (as defined below), as well as software applications developed or distributed by Yahoo!’s Syndication Partners that provide access to or enable algorithmic search services or paid search services from Yahoo! (“Syndication Properties”). “Syndication Partner” means a third party with whom Yahoo! has contracted to provide algorithmic search services or paid search services.

Subject to certain specified restrictions, Yahoo! will have full flexibility with respect to the user experience, content and look and feel on all of its web pages, and will also be entitled to use the paid search services and algorithmic search services for non-internet search queries with minimal restriction . . .

Microsoft’s mapping services and mobile search services. Yahoo! may implement each of the mapping services and the mobile search services on a non-exclusive or an exclusive basis. Yahoo! also has the option to work with Microsoft to implement the services on other platforms. If Yahoo! elects to receive services for other platforms, it must receive such services on an exclusive basis.

Revenue Share Payments and Other Payments

During the first five years of the Term, Yahoo! will be entitled to receive 88% of the net revenues generated from Microsoft’s services on Yahoo! Properties (the “Revenue Share Rate”). Yahoo! will also be entitled to receive its share (at the Revenue Share Rate) of the net revenues generated on Syndication Properties after the Syndication Partner’s share of net revenues is deducted. For new Syndication Properties during the Term, and for all Syndication Properties after the first five years of the Term, Yahoo! will receive its share (at the Revenue Share Rate) of the net revenues generated from Microsoft’s services on Syndication Properties after the Syndication Partner’s share of net revenues and certain Microsoft costs are deducted.

On the fifth anniversary of the Commencement Date, Microsoft will have the option to terminate Yahoo!’s sales exclusivity for premium search advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93% for the remainder of the Term, unless Yahoo! exercises its option to retain its sales exclusivity, in which case the Revenue Share Rate would be reduced to 83% for the remainder of the Term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90% for the remainder of the Term.

Microsoft will also pay Yahoo! a payment of $50 million annually during the first three (3) years of the Search Agreement. Yahoo! may use these payments to partially cover transition and implementation costs not otherwise covered under the Search Agreement.

Termination Provisions

Yahoo! may terminate the Search Agreement if the trailing 12-month average of the RPS in the United States (the “U.S. RPS”) of Yahoo! and Microsoft’s combined queries falls below a specified percentage of Google Inc.’s (“Google”) estimated RPS measured on a comparable basis or if the combined Yahoo! and Microsoft query market share in the United States falls below a specified percentage; (d) on the fifth anniversary of the Search Agreement, and any time thereafter, Yahoo! has the right to terminate the Search Agreement if the trailing 12-month average of Yahoo!’s U.S. RPS is less than a specified percentage of Google’s estimated RPS; or (e) subject to exceptions, either party may terminate if a law, regulation or order would have a significant, adverse impact on a primary aspect of such party’s intended benefit of the Search Agreement.

Transition and Implementation Plan

Microsoft will hire not less than 400 Yahoo! employees (the “Transferred Employees”) and will offer the Transferred Employees market competitive compensation packages. In addition, Yahoo! and Microsoft will mutually agree on a retention plan to be paid for by Microsoft to assist in retaining the Transferred Employees and an additional 150 Yahoo! employees to be mutually agreed upon between Microsoft and Yahoo! to assist with providing the transition services.

The deal seems broader than the “web, image and video” search scope we heard before. Yahoo can terminate the deal if certain targets aren’t meet surrounding revenue per search, benchmarked to Google. At the five year mark the parties can change who runs “premium sales.” The rev share percentages change accordingly.

On a related note, there’s an opinion piece in the Wall Street Journal that argues these terms give Redmond a bigger win than Yahoo in Microsoft CEO Steve Ballmer’s “win-win” scenario but that, in the larger scheme of things, Google may have already won the game:

The deal is a clear win for Microsoft and a qualified win for Yahoo. The big question is whether it makes any difference in the only contest that really matters, which is the one with Google. The risk for both Microsoft and Yahoo is that the contest is already over. Second place won’t really matter, especially as the competition shifts to Microsoft’s home turf: operating systems.

Related coverage:

• It’s Finally Official, Microsoft & Yahoo Make A Deal, Yahoo Gives Up On Search
• Live Blogging The MSFT – YHOO Search Press Conference
• Microsoft-Yahoo Deals 2008 & 2009, Side-By-Side
• A Search Eulogy For Yahoo
• Micro-Hoo Details: Q&A With Mehdi & Schneider
• The Microsoft-Yahoo Search Deal, In Simple Terms

Microsoft reported worse-than-expected earnings yesterday. The company was about a billion dollars off analysts consensus expectations. According to the Microsoft release, the company had huge revenues but still missed:

$13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and $0.34 per share, which represented declines of 30%, 29% and 26%, respectively, when compared with the prior year period.

For the full fiscal year revenues were $58.44 billion, a 3 percent decline from fiscal 2008 and the first time that sales had declined in the company’s more than 30 year history. The decline was blamed on the economy, among other factors, but also the rise of netbooks. According to Microsoft netbooks have a roughly 11 percent share of the PC market. Microsoft’s OS dominates there but margins are much smaller.

Online business services, which houses Microsoft’s various online and internet ad businesses saw revenues of $731 million in the quarter. That compares with $837 million a year ago, a 13 percent decline. The unit lost $732 million in the quarter (compared with $485 in the same period last year) and for the full fiscal year there was a loss of $2.25 billion. Some people are speculating that these results and tepid guidance for the future will mean more job cuts.

Against this backdrop the Wall Street Journal is reporting that Yahoo’s board is meeting to discuss a potential search (and display ads) deal with Microsoft:

Yahoo Inc. directors plan to meet Thursday for an update about a potential search partnership with Microsoft Corp., according to people briefed about  the meeting.

The meeting follows several Yahoo board calls in recent days, organized as talks between the parties continued to progress, according to one person familiar with the matter.

There’s been lots of buzz and speculation that a deal between the companies is “imminent.” The Journal article suggests that some Yahoo board members are fearful of potential objections from regulators who essentially forced Google to abandon the search-ads deal it struck with Yahoo. That earlier Google-Yahoo deal was partly responsible for thwarting Microsoft’s acquisition of Yahoo.

The scope of a deal between Microsoft and Yahoo has also been a matter of considerable speculation. After the initial collapse of the acquisition talks between Microsoft and Yahoo, Redmond tried unsuccessfully to buy just the search portion of the business. Now the question is: if a deal does happen will Bing essentially take over Yahoo search? In other words, will we see: Yahoo search, “powered by Bing.”

I think a wholesale substitution of Yahoo search with Bing is unlikely. More likely in my mind is a deal that resembles (and expands upon) the one that Google struck with Yahoo, allowing Microsoft adCenter advertisers to gain distribution in Yahoo search results. But it’s also likely to contain a, perhaps reciprocal, display component.

Some sort of deal is almost certain but we’ll have to wait to see what it includes and what is left out. One indication that a deal is likely is Yahoo CEO Carol Bartz’s favorable remarks regarding Bing. On the earnings call she fumbled a bit initially when asked about Bing’s impact on Yahoo, as though taken by surprise, but ended with a compliment:

Sandeep Aggarwal – Collins Stewart

What is your first impression on Bing and are you seeing any visible changes in user behavior at Yahoo! search after the big launch?

Carol Bartz

I think actually Bing is a good product. It actually extends sort of the experimentation around search and how people use it instead of just thinking like a standard blue link. I think they have done a good job. Unfortunately it is only a month into it so it is pretty hard to understand whether it is just curiosity driving what is happening or they are actually going to gain share. I think Microsoft should be given kudos for Bing. I think they have done a nice job.

This stands in contrast to her early somewhat sarcastic remarks about Bing:

Bartz also said she was not concerned that Microsoft’s new search engine—Bing—may have surpassed Yahoo in market share for one day last week, according to a report by StatCounter. “One day is one day,” she said. “They didn’t beat us by much. It was one day. I think it’s gosh maybe it was in Omaha some place; It was some small area.”

So let’s assume a deal (maybe in the next two weeks). Once that happens the Justice Department scrutiny and regulatory approval process can begin. It’ll be a deja vu experience for everyone involved, except Google and Microsoft will have switched roles.

Today, Microsoft announced that it had delivered layoff notices to 3,000 employees across several divisions (1,200 in Washington state). This comes just months after an initial round of 1,400 who were let go when Microsft announced second quarter earnings. At that time, Microsoft said it planned to eliminate 5,000 jobs this year, and Microsoft’s CEO Steve Ballmer said that today’s news was phase two of that plan (with the remainder planned for sometime before June 2010 and “as quickly as possible”).

However, Steve Ballmer didn’t rule out additional layoffs. In an internal memo, he said:

As we move forward, we will continue to closely monitor the impact of the economic downturn on the company and if necessary, take further actions on our cost structure including additional job eliminations.

No word on what departments were hit, although an anonymous comment to the Mini-Microsoft blog claimed that no layoffs happened in Live Search and in fact, they have been given extra headcount while Windows was heavily affected. Another anonymous commenter claimed that entire groups in MSN were eliminated. Others reported that several groups within  Microsoft Advertising were impacted.

If MSN was indeed hit, that move seems a bit shortsighted as a large portion of Microsoft’s search traffic still seems to come through MSN rather than Live Search. Seems that Microsoft should focus on making an attractive property even more attractive if since it accounts for so much of its valuable search traffic.

So far, little  concrete has been announced about how these cuts impact Microsoft’s product plans, but you can follow the disccussion on Techmeme.

Over the weekend, there seemed to be a lot of activity on people coming and going at search companies. I figured I sum up some of those moves in a short post here.

• Former Googler Douglas Bowman, who resigned from Google due to Google being too data centric has taken a job at Twitter, according to TechCrunch.
• Priti Choksi, a director of strategic partner development at Google has moved to Facebook, according to VentureBeat.
• Well-known Greg Linden is Leaving Microsoft after Microsoft has “dismantled” Live Labs.
• Brad Williams, Yahoo Inc.’s head of communications has left the company. Rumors say he was fired. More on this at the Wall Street Journal.
• Yahoo hired former Adobe executive, Bryan Lamkin, to lead up the applications group according to News.com.
• Former AOL executive, Mike Jones, will become the COO of MySpace according to TechCrunc.
• Yahoo is reportedly hiring up to 150 people in India.

PaidContent.org reports that Microsoft’s Live Labs group has been cut in half, and the remaining crew will focus only on search. The departing team members will move on to other Microsoft product groups, such as Live Search, Windows Mobile, and Microsoft Advertising.

In a post on the Live Labs Blog, Microsoft downplays the changes:

“…moving great people and projects into the the product groups has always been part of our process, so today’s news is entirely consistent with what we’ve always done.

Contrary to recent whispers and tweets, we are not shutting down, disbanding, dismantling, or anything of the sort.”

Live Labs is Microsoft’s “vision” group, charged with researching new ideas and bringing them to life. Photosynth is considered the group’s most successful project to date. It’s been used by NASA for Space Shuttle images, and was integrated into Live Maps late last year.

A Microsoft spokesperson tells paidContent.org that the current economy forced the company to restructure Live Labs:

“Economic conditions are imposing constraints that challenge the original Live Labs model by diminishing the group’s ability to transfer innovations to business groups who’re understandably giving priority to ‘needs’ vs. ‘opportunities.’”

Microsoft’s not alone in focusing its research like this; we reported late last year that Google was changing its famed “20% time” to focus on meeting needs.

The Yahoo-to-Microsoft defections continue with news today from paidContent.org that Jan Pedersen is the new chief scientist for Live Search.

This one isn’t exactly a defection, because Pedersen comes to Microsoft from Amazon’s A9.com. But he was Chief Scientist and VP, Search and Advertising Technology Group, at Yahoo prior to that. And before his Yahoo stint, Pedersen was with both Alta Vista and Infoseek.

He’s the latest in a string of ex-Yahoo’s to start working for Microsoft. Others include Sean Suchter, Dr. Qi Lu (who will be keynoting at SMX Advanced), and, most recently, Larry Heck.