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Microsoft Misses Earnings, Yahoo Board Meets About Potential Microsoft Search Deal

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.

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