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With search, size matters, says Microsoft

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Microsoft has yet to turn a profit on its search and advertising business despite having invested billions.

The software maker’s stockholders so far have been guardedly positive about the deal, perhaps because it did not require a $9 billion upfront payment to Yahoo, a condition of a similar deal proposed last year. If Microsoft can’t use this partnership to improve its search finances, though, they will eventually run out of patience.

Microsoft expects to spend up to $700 million to get the arrangement up and running, something that could take two years to fully deploy worldwide. It may spend up to $200 million within the next 12 months alone.

But the company believes it’s worth it.

With the partnership, Microsoft will funnel Yahoo’s nearly 3 billion monthly Web searches. Add that to the 1 billion Microsoft gets on its own, and the software maker will quadruple the queries it processes, allowing its search engine to gain even more insight into how to improve the experience.

Every move a search user makes is fed back into the system, so when the next person comes along with a similar problem, the search engine is a little bit smarter about solving it. For example, if five people in a row click on the fifth link on the results page for “Seattle Space Needle,” the search engine — a sophisticated computer program — might try moving that link up to the top.

When search results give people what they’re looking for right away, they’re more likely to come back. It’s a case of the sum totaling more than its parts: The deal is about more than simply combining search traffic from the two sites.

More people doing more searching on Microsoft-powered sites should then attract more companies wanting to peddle their products through short text ads next to search results. Some may not have bothered advertising on Microsoft and Yahoo separately, because as separate sites their audiences were too small to make up for the hassle of recreating Google search ad campaigns on a second and even a third system. Those advertisers may be enticed by the convenience and reach of this partnership, or by the idea of having a solid second place to spend their ad dollars to keep Google in check.

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