Yahoo has revealed in a US Securities & Exchange Commission filing that nearly one-third of its revenue last quarter — 31% — came from its search deal with Microsoft, according to a Bloomberg report. That’s far higher than the “more than 10%” figure Yahoo previously acknowledged, making it seem even more difficult for the company to potentially walk away from the deal.
From the Bloomberg report:
The company outlined the portion of revenue it gets from a search agreement with Microsoft Corp. (MSFT), following inquires stretching back several months, according to new regulatory filings that were made public yesterday. Yahoo, which had previously said the deal comprised more than 10 percent of sales, said the pact generated 31 percent of revenue in the latest quarter.
On page 71 you disclose that revenue under the Search Agreement with Microsoft represented more than 10% of the company’s revenue during 2011 and 2012. Please tell us what consideration was given to quantifying the percentage or amount of revenues attributable to the Microsoft arrangement to more clearly demonstrate the significance of this concentration.
In response, Yahoo’s last quarterly 10-Q filing, posted on November 11 and also highlighted by Silicon Beat, had further details. In particular, Note 16 on page 27 says:
Approximately 27 percent and 24 percent of the Company’s revenue for the three and nine months ended September 30, 2012, respectively, was attributable to the Search Agreement, and approximately 31 percent and 30 percent of the Company’s revenue for the three and nine months ended September 30, 2013, respectively, was attributable to the Search Agreement.
I’ve bolded the key parts, that for the last quarter, 31% of Yahoo’s total revenue came from Microsoft (originally, our headline said 31% of search revenue, but seeing the filings makes clear this is for all Yahoo revenue). That’s up from 27% for the same quarter in the previous year.
The filing has been out for nearly a month; I think the news is that Bloomberg was the first to spot and report on the new figures.
A Disappointing Deal
The 2009 deal between Yahoo and Microsoft has never produced as much revenue as originally promised. Microsoft was on-the-hook to cover any shortfalls for the first 18 months of the deal. It has extended those guarantees twice now, carrying through until March 31, 2014. The articles below have more background on this:
- As The Yahoo-Microsoft Search Alliance Falls Short, Could A Yahoo-Google Deal Emerge?
- Yahoo Extends Microsoft Search Deal & Revenue Guarantees
- Why Yahoo Will Never Reach The “Revenue Per Search” That Microsoft Promised
The new figures from Yahoo suggest that it is much further away from the long-standing revenue goals than previously thought, making any potential “walk-away” from Microsoft difficult. The company now lacks up-to-date search technology to compete with either Microsoft’s Bing search engine or Google, if it goes alone — and it would take a harder revenue hit in doing so, assuming Microsoft doesn’t agree to extend revenue guarantees for a third time.
Of course, Yahoo could be in a position to get a better deal from Microsoft by threatening to go to Google. Yahoo can do this without question as of February 23, 2015. It potentially could do so when the next revenue guarantees expire, depending on the exact wording of that agreement and how it relates back to the original agreement (see our previous story for more on this). See also this background story:
This assumes that Yahoo would be allowed to partner with Google. It was denied that opportunity back in 2008 on antitrust grounds when it wanted, leading to the shotgun partnership with Microsoft. Now that Yahoo has less market share, maybe this would be allowed. Google’s certainly open to it.
Yahoo’s already tried to get out of the agreement in Taiwan and Hong Kong and lost legally in October. Publicly, Yahoo still talks optimistically about search, as it did in October. But in reality, Yahoo continues to lose share to Bing, the search engine that Microsoft owns. It’s losing to its partner even as it remains beholden to that partner, and there’s no clear plan on how that’s going to be reversed.