Yahoo's search losses could blunt benefits of Microsoft deal

SAN FRANCISCO - While Microsoft Corp. and Yahoo Inc. are nearing anticipated regulatory clearance for their Internet search and advertising partnership, Yahoo's continued loss of market share could blunt the anticipated benefits for both companies.

According to comScore Inc. data published Tuesday, Microsoft's U.S. search market share rose to 10.3 percent in November. Yahoo's share, meanwhile, slipped to 17.5 percent, according to the data.

Both companies still lag far behind Google Inc., which captured a 65.6 percent share in November. And Yahoo's losses chip away at the prospects for a Microsoft-powered search engine that can gain significant momentum on the market leader. In addition, because of the particular structure of the planned partnership, a declining search share could translate directly into a smaller financial reward for Yahoo.

Yahoo's monthly market share loss was its second in a row - it saw a 0.8 percent drop in October, comScore said. The company blamed that decline in part on the scuttling of toolbar deals that had it placed prominently as the default search service on personal computers made by Hewlett-Packard Co. and others.

One of Microsoft's goals in entering into its partnership with Yahoo was an instant capturing of a significantly larger, combined search audience - and with it, more advertisers.

Under the terms of their partnership, Microsoft's Bing search engine would power results on Yahoo pages, while Yahoo would be able to trim costs related to search and focus on display advertising. The deal would also ship hundreds of Yahoo employees to Microsoft, while Yahoo would receive about $150 million in support from Microsoft to help get things underway.

However, the partnership is currently being reviewed by antitrust regulators at the U.S. Justice Department. The deal is getting a close look, as it would essentially shrink the U.S. search market from three large players to two, though it's generally expected to win approval.

Both Microsoft and Yahoo say they hope to start the partnership by early next year.

Jefferies & Co. analyst Youssef Squali wrote in a research note published Wednesday that Yahoo's market share losses could come back to haunt it later.

Yahoo's market share is critical, if it is to enjoy the full benefit of the Microsoft partnership, Squali wrote. That's because Yahoo isn't guaranteed a certain level of revenue from the deal, but rather a certain amount per search - a lower number of searches done on the site would therefore equate to less revenue.

"It is very important that Yahoo stabilizes its market share if it is to maintain the expected revenue stream from the partnership with Microsoft," Squali wrote.

Broadpoint AmTech analyst Ben Schachter added in his own note to clients that, "Yahoo must find a way to stabilize its share loss."

While Schachter cautioned that comScore data is not always reliable as a gauge of a company's heath, he wrote that "if these trends are real and persist," he may be compelled to re-think his outlook for Yahoo's future revenue growth.

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