Microsoft has effectively renewed its search vows with Yahoo a second time, pledging once again that Yahoo will indeed earn a high “revenue per search” that was promised back when the alliance was made in 2009. That’s not going to happen. When the latest extension expires in a year, the expected RPS still won’t be reached. Microsoft will either renew again or Yahoo will walk away, if it can.
All About RPS
Yahoo Extends Microsoft Search Deal & Revenue Guarantees is our story on Search Engine Land today that covers how Microsoft is extending a part of its deal with Yahoo about “revenue per search” or RPS.
Don’t know what all this RPS business is about? The short story is that when the two entered into a deal in 2009, Yahoo was promised that it would earn an amount for each search that happens that was somewhat competitive with Google.
In other words, if Google was earning on average $0.40 per search (take all the searches it processes, divided by all the search revenue it makes to get that figure), then Yahoo might have been promised to get close to this with Microsoft’s help. For example, maybe Microsoft promised that Yahoo might make $0.25 per search.
We don’t know exactly what the RPS is supposed to be, because Yahoo has never revealed this. Those figures above are just examples to help explain the concept. But what we do know is that Yahoo has never met the agreed-upon RPS goal.
The Elusive RPS Goal
Each quarter, Yahoo would talk about how it was always getting closer to hitting that goal but never quite reaching it. My story from last year, As The Yahoo-Microsoft Search Alliance Falls Short, Could A Yahoo-Google Deal Emerge?, goes into depth about this.
In that story, I covered my assumption that since Yahoo wouldn’t state the actual gap, it must be pretty bad. I also listed the “progress” toward closing the gap on a quarter-by-quarter basis, based on what was said at Yahoo earnings calls.
Here’s an update on that:
April 2011: Unknown RPS gap used as benchmark
July 2011: Gap reduced 20%
October 2011: Gap reduced a further 10%
January 2012: Gap reduced 5% to 9%
April 2012: Gap reduced 0%
July 2012: Gap reduced 0%
October 2012: “Yahoo-driven RPS” improvements happened, but nothing specific about the gap
January 2013: “We are improving our own RPS” but nothing specific about the gap
April 2013: “Still a gap”
The last three items are notable. Under the command of new CEO Marissa Mayer, Yahoo stopped giving out any percentage of how much the gap was reduced at all. That made it harder for people like myself, investors or analysts to have any idea if the gap was being closed.
Ken Goldman
Mind The Gap, Because It’s Staying A Gap
Clearly, it was not. By April 2013, in the Q1 2013 earnings call, Yahoo still hadn’t reached the goal and worse, the gap was no longer covered by Microsoft. As Yahoo CFO Ken Goldman said:
The RPS guarantee for Microsoft lapsed in the U.S. and Canada at the end of March. There was still a gap in monetization and we will work with Microsoft to improve our search monetization.
Since then, the agreement has been extended, as today’s news covers. That should bring $45 to $100 million to Yahoo over the coming year, according to what Goldman said on the Q4 2012 call:
If you look at year-over-year, the lack of RPS guarantee is about $100 million lower revenue. Again, this is year-over-year. If you look at it now, we are improving our own RPS. So if you look at what it would have been had we continued beyond the first quarter, it’s probably more in the $45 million to $65 million rough range.
Yahoo Looks To Boost RPS On Its Own
I bolded the “we are improving our own RPS” part to emphasize how, since October 2012, Yahoo’s been dropping references in its earnings calls to its “own” RPS versus apparently a “Microsoft” RPS. That’s a further hint that Yahoo itself knows that Microsoft has no magic RPS solution here, and that Yahoo itself ultimately has to increase its search earnings.
Microsoft has two ways to increase RPS: deliver more ads to Yahoo or get more money for those ads. It clearly hasn’t done either in a way to impact RPS.
That leaves Yahoo to figure out its own RPS solutions, most notably the new cost-per-lead ads that it rolled out in December. An expanded Yahoo deal with Chitika announced today may also help, as perhaps might Yahoo’s new stream ads.
Yahoo-Google In 2014?
Perhaps over the coming year, Microsoft will find that magic solution that leads to Yahoo seeing an RPS boost. But given years now of underperformance, that doesn’t seem likely.
Instead, Microsoft has bought another year of Yahoo loyalty. Yahoo’s has received another year to figure out how to find $45-$100 million to reassure analysts who, frankly, haven’t seemed that bothered about RPS guarantees lately. And in a year, maybe, just maybe, we’ll see talk of a Yahoo-Google alliance more likely.
Postscript: The Wall Street Journal is now out with an article saying that Yahoo is trying to find a way to break its deal with Microsoft. I explore more about this, and why Yahoo can’t easily walk away, in my follow-up piece: Even If Yahoo Wants To Leave Microsoft, Here’s Why It Can’t.
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