Three-year deal to put Google’s results and ads into some of Yahoo’s search results needs US Department of Justice approval and still might get vetoed by India or EU action.
Reunited, and it feels so good. Well, we’ll see if that line from the classic song plays out for Yahoo, which has revealed it wants to be together with Google again in a deal for search results. The deal excludes Europe, almost certainly to avoid anti-trust issues there. It also will depend on US Department of Justice approval.
The Deal, In Summary
As part of today’s Yahoo earning news, it revealed a new search deal with Google:
In October, the Company reached an agreement with Google that provides Yahoo with additional flexibility to choose among suppliers of search results and ads. Google’s offerings complement the search services provided by Microsoft, which remains a strong partner, as well as Yahoo’s own search technologies and ad products.
Wondering how Yahoo and Google can be together, when Yahoo is supposed to be with Microsoft? What we mean by Yahoo and Google being together again? And what’s in the deal? Come along.
Isn’t Yahoo With Microsoft?
If you’re thinking that Yahoo and Microsoft have a search deal, you remember correctly. They do, and they renewed that in April of this year. Our FAQ: The New Yahoo-Microsoft Deal, Explained story also had more background on that.
As part of the renewal, Yahoo agreed that Bing’s ads would appear on 51 percent of the desktop searches that Yahoo delivers. The other 49 percent could be “powered” by Yahoo’s own ad system or from any third party that Yahoo wanted to use.
And Yahoo Had Been With Google Before?
Years ago — back in 2000 — Yahoo was partnered with Google to carry both Google’s search results and ads. That partnership lasted for many years, until Yahoo eventually developed its own in-house search technology and ad serving systems in 2004.
Yahoo gave up its own internal search technology when its search deal with Microsoft was formally established and got the go-ahead in 2010. But that deal never performed as expected, and Yahoo’s been looking over the past two years for ways to generate more revenue from search beyond its deal with Microsoft.
What’s In The New 3-Year Google Deal?
Let’s go to the Form 8-K filing on the deal and look at the officialese, which I’ll break down as best I can into regular-speak:
On October 19, 2015, Yahoo! Inc., a Delaware corporation (“Yahoo”), and Google Inc., a Delaware corporation (“Google”), entered into a Google Services Agreement (the “Services Agreement”). The Services Agreement is effective as of October 1, 2015 and expires on December 31, 2018.
Right off, we’re talking just over a three-year term. However, the agreement can end early for various reasons, as explained more below.
Google To Power Both Mobile & Desktop
Next up, this:
Pursuant to the Services Agreement, Google will provide Yahoo with search advertisements through Google’s AdSense for Search service (“AFS”), web algorithmic search services through Google’s Websearch Service, and image search services. The results provided by Google for these services will be available to Yahoo for display on both desktop and mobile platforms.
Basically, this says that Yahoo can show Google’s search results. And by search results, that means both the editorial “free” listings, as well as the ads. Yahoo needs to serve both, because it has no editorial listings of its own, no crawler that combs the Web for such content. And Yahoo probably can’t — or can’t afford — to show Google ads against editorial listings provided by Microsoft’s Bing search engine.
Could Yahoo Go Over 51% On Mobile With Google?
Yahoo also can use these results for both mobile and desktop. On desktop, it’s limited to a cap of 49 percent that potentially could come from Google, as Microsoft is guaranteed the other 51 percent.
On mobile, Yahoo has no such limit. There, it could choose to fully serve out Google results even at the expense of its own Gemini ads system.
Deal Excludes Europe, Probably For Anti-Trust Reasons
The deal is for these regions:
Yahoo may use Google’s services on Yahoo’s owned and operated properties (“Yahoo Properties”) and on certain syndication partner properties (“Affiliate Sites”) in the United States (U.S.), Canada, Hong Kong, Taiwan, Singapore, Thailand, Vietnam, Philippines, Indonesia, Malaysia, India, Middle East, Africa, Mexico, Argentina, Brazil, Colombia, Chile, Venezuela, Peru, Australia and New Zealand.
You can see all of North America is covered. Several Asian countries are included, as are Australia and New Zealand. Parts of South America are also covered. What’s missing? Europe.
Why not Europe? Google already has an anti-trust action happening against it in the European Union. It probably does not want the attention or criticism of doing a deal with Yahoo there, especially with Google already having a 90-percent or more marketshare in many EU countries.
Yahoo Has Flexibility, Could Skip Google Search Entirely
Under the Services Agreement, Yahoo has discretion to select which search queries to send to Google and is not obligated to send any minimum number of search queries. The Services Agreement is non-exclusive and expressly permits Yahoo to use any other search advertising services, including its own service, the services of Microsoft Corporation or other third parties.
Basically, this says that Yahoo doesn’t have to guarantee anything to Google. It could decide to send no queries to Google, if it wanted to.
Yahoo Gets Cut Of Ads, Amount Not Said; Image Search Named
How about getting paid? Well…
Google will pay Yahoo a percentage of the gross revenues from AFS ads displayed on Yahoo Properties or Affiliate Sites. The percentage will vary depending on whether the ads are displayed on U.S. desktop sites, non-U.S. desktop sites or on the tablet or mobile phone versions of the Yahoo Properties or its Affiliate Sites. Yahoo will pay Google fees for requests for image search results or web algorithmic search results.
This is pretty standard, saying that Yahoo will get a percentage of what Google makes off its ads that are shown on the Yahoo network.
That percentage can — and probably will — vary depending on whether it’s from desktop or mobile.
Interestingly, there’s no minimum guarantee from Google to be paid to Yahoo. That’s sometimes the case in these deals. It was in the original Yahoo-Microsoft deal.
Finally, Yahoo is obligated to pay Google if it uses its editorial (“algorithmic”) search results for Web listings or images. This is likely to ensure that Yahoo doesn’t take Google’s listings but shows Yahoo’s own ads against them. In such a case, Google would be earning nothing yet providing a service.
Terminating In Case Of US Opposition
At the end, we get this:
Either party may terminate the Services Agreement
(1) upon a material breach subject to certain limitations;
(2) in the event of a change in control (as defined in the Services Agreement);
(3) after first discussing with the other party in good faith its concerns and potential alternatives to termination
(a) in its entirety or in the U.S. only, if it reasonably anticipates litigation or a regulatory proceeding brought by any U.S. federal or state agency to enjoin the parties from consummating, implementing or otherwise performing the Services Agreement,
(b) in part, in a country other than the U.S., if either party reasonably anticipates litigation or a regulatory proceeding or reasonably anticipates that the continued performance under the Services Agreement in such country would have a material adverse impact on any ongoing antitrust proceeding in such country,
The DoJ decision left Yahoo with Microsoft as pretty much the only choice for doing a deal. As a result, the deal that Microsoft eventually offered to Yahoo in 2009 was much less lucrative than the one it offered in 2008, when it was competing with Google.
In the years since, the deal arguably has helped Yahoo drop from a second-place search engine in the US with its own search technology to a third-place competitor that’s dependent on others.
Clearly, there’s a fear that the US competition authorities still might not favor a Yahoo-Google tie-up, despite the fact that Yahoo is less dominant than it last was and a potential argument that the previous DoJ objection helped lead to Yahoo’s current decline.
In fact, at the end of the filing, there’s this:
In connection with the Services Agreement, Yahoo and Google have agreed to certain procedures with the Antitrust Division of the United States Department of Justice (the “DOJ”) to facilitate review of the Services Agreement by the DOJ, including delaying the implementation of the Services Agreement in the U.S. in order to provide the DOJ with a reasonable period of review.
This is all going to the Department of Justice for review. If approved, the companies will move ahead. Unless…
The EU And India Get Final Word
Even though the deal isn’t involving Europe, the agreement has termination language that involves possible EU objections:
(c) in its entirety if either party reasonably anticipates a filing by the European Commission to enjoin it from performing the Services Agreement or that continued performance of the Services Agreement would have a material adverse impact on any ongoing antitrust proceeding involving either party in Europe or India, or
The deal does involve India, where Google also faces antitrust scrutiny, so the language including India makes more sense.
Google is almost certainly so paranoid that the agreement might impact its ongoing antitrust actions in both the EU and India that if gets the idea either political entity will object, the whole deal could be closed.
Other Termination Reasons
There are a few last boilerplate reasons the agreement might be terminated:
(d) in its entirety, on 60 days notice if [sic] the other party’s exercise of these termination rights in this clause (3) has collectively and materially diminished the economic value of the Services Agreement.
Each party agrees to defend or settle any lawsuits or similar actions related to the Services Agreement unless doing so is not commercially reasonable (taking all factors into account, including without limitation effects on a party’s brand or business outside of the scope of the Services Agreement).
In addition, Google may suspend Yahoo’s use of services upon certain events and may terminate the Services Agreement if such events are not cured. Yahoo may terminate the Services Agreement if Google breaches certain service level and server latency specified in the Services Agreement.
If I read this correctly, either party could end with 60 days notice for any reason. Just because. There’s also a nebulous “certain events” that aren’t itemized, unknown reasons Google could terminate. Yahoo can drop if Google doesn’t serve content up quickly enough.