Microsoft (MSFT) Has A Billion Reasons To Care Who Buys Yahoo

Microsoft has billions of reasons to care about who might buy Yahoo, and it’s quietly making moves to ensure the troubled web giant goes to the right company. The company’s vice president of strategy and acquisitions, Peggy Johnson, is reportedly engaged in talks with a number of possible Yahoo buyers to explore the possibility of partly financing a Yahoo acquisition, in exchange for favorable treatment of an arrangement that sees Microsoft’s Bing search engine providing a majority of Yahoo’s desktop search engine results, according to Re/code.

"Offering to help with financing is a smart move for Microsoft,” BGC Partners’ Colin Gillis told USA Today. “They must protect their investment."

Microsoft effectively abandoned its territory in the display ad and advertising technology business over the past year, mostly because it wanted to focus more on its cloud and software interests. But it still makes plenty of easy money from Yahoo. The company delivers 51 percent of Yahoo’s search result ads on desktop (Yahoo serves up everything on mobile), a not insignificant total: Yahoo is responsible for more than 12 percent of all U.S. desktop search traffic, according to comScore. Bing is responsible for more than 20 percent, and Google essentially serves up everything else.

And while it’s difficult to tease out exactly how much money Microsoft earns from Bing — the company does not break out its Bing revenues regularly — it's a meaningful total. Microsoft’s chief revenue officer reported last fall that the search engine earned the company more than $1 billion in the second quarter of 2015, which would have been good for about 5 percent of the company’s earnings over that period. Since then, search revenues have slowly and steadily crept upward; the company reported its search ad revenues were up 20 percent in its most recent quarterly earnings statement.

To keep that income stream flowing, Microsoft would likely have to kick in between $1 billion and $3 billion for whoever might ultimately buy Yahoo’s core business. Yahoo is reportedly seeking a purchase price of $10 billion, a number that is not being taken seriously by insiders. "I want a pretty pony from Microsoft communications head Frank Shaw, and have a better chance of getting it," Re/code's Kara Swisher wrote last week.

Rumored buyers have included Alibaba, AT&T, Comcast, Verizon and, per Reuters, a number of private equity firms. If one of them cuts this off, either by shuttering Yahoo's search operating entirely or by changing the deal, it would cut off a substantial stream of income, and put that audience up for grabs, something Microsoft, as the clear underdog, likely wouldn't benefit from.

The deal between Microsoft and Yahoo stretches back to 2010, when Bing was just a minnow and Yahoo was trying to find a way to make more money off its search traffic, which it was quickly losing to Google. In 2015, Yahoo's CEO Marissa Mayer altered the deal slightly, giving Yahoo the chance to sell some of its remaining 49 percent of search to Google.

No matter how it shakes out, the stream Microsoft's looking to protect will soon start to weaken. Desktop search traffic peaked in 2013, and has been slipping away steadily, as more and more people conduct searches on the computers in their pockets.