More on Mayer’s Search Plans for Yahoo: The “Three S’s” and Slipping Through a Microsoft Loophole
Since Re/code revealed, weeks ago, that Yahoo CEO Marissa Mayer was making a big push to return the company to the search business — rolling back the Silicon Valley Internet giant’s departure from the technology side with a 10-year search partnership struck with Microsoft in 2009 — sources inside the company have been sending me more details about her plans.
As I previously reported, Mayer is trying to move Yahoo squarely into competition with both Google and Microsoft in an attempt to regain control over one of its key revenue streams. To do so, she has ordered up two under-the-radar initiatives that could potentially move the company into algorithmic search, as well as search advertising, again.
The internal code names for her not-insignificant efforts — which are not actually being done together, although they are in tandem — are borrowed from sports. In this case, basketball and baseball: Projects Fast Break and Curveball, respectively. Said one source, the projects are being developed in tandem on the organic and monetization sides.
According to people with more detailed knowledge of the plans, Mayer is trying to consolidate it all internally in a plan that is being called the “three S’s” — Stream, Shopping and Search. But rather than focusing on the Web and keywords, which Yahoo is contractually bound to allow Microsoft to serve under a 10-year search and advertising partnership deal, Mayer is aiming all this toward mobile and contextual search.
“When I look at things like contextual search, I get really excited,” she said earlier this week at the Goldman Sachs investors conference in San Francisco. “The amount of information available to build a service on is just incredible.”
Unlike keywords, which are input by users, contextual search uses all kinds of signals that they share, most times without an effort, as they move through the world, both digitally and physically. This is the red-hot opportunity of mobile, because consumers are constantly beaming information from devices that can be taken advantage of by Yahoo and extended to marketers.
Mobile could also be a way out, since it has always been served by Yahoo, even as the area has grown in size and importance. More to the point, as long as the query is not based on a search keyword, it could be a big loophole here for Mayer, since it is not included in the agreement with Microsoft to provide search and search advertising technology.
In essence, with that deal, Yahoo signed away any ambitions to be a real player in search.
Many at Yahoo think that was a big mistake. “It’s like half pregnancy. A company cannot outsource the foundations of one of its two core businesses to a third party, and these deals never meet their ‘projected’ goals,” said one person with knowledge of the situation, who underscored the “ripple effects” of the deal, including top talent leaving and anchoring Yahoo’s product velocity to development cycles.
Added the source, in a sentiment I have heard from many inside Yahoo who have spoken to her: “The minute Marissa finds a way out of that deal without committing suicide, she will. She hates it.”
Indeed, Mayer even has used legal means to try to slow the main deal, trying but failing to delay the transition of paid search in Taiwan and Hong Kong. As I noted in a post in November about the issue: “In other words, despite leaking all over the place that CEO Marissa Mayer wanted to get out of the search partnership with Microsoft (and she still might want to), Yahoo’s not getting out of the rollout globally. Yet!”
Interestingly, in its legal effort, Yahoo used the excuse of the Microsoft CEO transition as one of its arguments for the delay. The recent appointment of longtime Microsoft exec Satya Nadella, then, could be an interesting development. He was a key exec at Microsoft’s Online Services division at the time of the initial Yahoo deal and should be able to go toe-to-toe with Mayer, who ran search products — though not the technology itself — at Google.
The first indication of the status of the pair’s relationship could come soon, related to revenue-per-search guarantees, the latest of which is set to expire in March. The income from search has become important to Yahoo, which said in a recent regulatory filing that 31 percent of its revenue came from its search deal, much higher than had previously been thought by investors.
So far, due to performance weakness, Yahoo and Microsoft have continued to renew it in some fashion. Here’s the relevant language on the agreement from Yahoo’s regulatory documents:
Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search (“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to Microsoft’s platform in that market based on the difference in revenue per search between the pre-transition and post-transition periods and certain other factors. The Company records the RPS Guarantee as search revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall in revenue per search occurred. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in the U.S. and Canada through March 2013 and in the second quarter of 2013, Microsoft extended the RPS Guarantee in the U.S. through March 2014. In June 2013, Microsoft and Yahoo! agreed upon the RPS Guarantee payment amounts to be paid to the Company for the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013. The Company also agreed to fixed quarterly payments in lieu of the RPS Guarantee in the U.S. for the quarters ending September 30, 2013, December 31, 2013 and March 31, 2014. In addition, the Company agreed to waive its right to receive any future RPS Guarantee payments in all other markets except Taiwan and Hong Kong.
That is likely to happen again, although I expect there will be lots more activity in the relationship as Nadella gains his footing and Mayer increases her efforts to bolster her search weaponry.
Her challenges — which are myriad — include recruiting back top search engineers and disconnecting Yahoo properties from its troubled Right Media Exchange and moving them smoothly to Curveball. Interestingly, Yahoo recently struck a $10 million, five-year deal with Carnegie Mellon that will “allow university researchers to access and experiment with the online giant’s data using a so-called ‘mobile toolkit.'”
The goal overall, said several execs, is to get Yahoo off its dependence on display ads — a quickly declining business for the company — and move to reliance on stream and search ads produced dynamically with the company’s contextual technology.
More to the point, said several sources, it seems to be about controlling Yahoo’s destiny. “Mayer is all about control,” said one exec close to the situation. “And this, to her, is core.”
In fact, onstage at the Goldman conference, Mayer stressed the need for Yahoo to go beyond “core search,” pointing to acquisitions like its Aviate app, which changes a mobile home screen on Android devices based on where a user is and what he or she is doing at that moment.
“We’re long on search,” Mayer said to the audience. Long indeed.