Trouble with the Yahoo-Microsoft Partnership

Microsoft has started to make some progress in search -- partly from the vast improvements to both its search technology and strategy with the Bing relaunch, and partly from the integration deal with Yahoo.

But things don't look so rosy from Yahoo's perspective, according to comments made by CEO Carol Bartz during an earnings call on Tuesday.

"The Search marketplace is encountering some issues related to Microsoft adCenter technology," Bartz said, according to a transcript of the call provided by Seeking Alpha.

"AdCenter isn't yet producing the RPS [revenue per search] we hoped for and are confident [is] possible. Advertisers are seeing strong ROI, but technical limitations in the current adCenter platform mean the click volumes just isn't there yet. We had expected RPS to be neutral by midyear, it's now evident that it will take Microsoft longer to achieve that goal. We expect that to happen by year-end. In the meantime, the RPS [guarantee] helps protect our revenue, and our view of the long-term potential of the marketplace remains unchanged."

Bartz did say that Microsoft understands the issues and is working hard on the internals of adCenter. "They have an aggressive roadmap to bring those to the marketplace," she said. She also said that some key advertisers are pretty pleased with the system.

"The good news is that many of our most important advertisers are realizing a much higher ROI on their campaign in the combined marketplace. We see major financial, auto, retail and customers spending multiples of what they spent with Yahoo and Microsoft previously because returns have been great," Bartz said.

Yahoo is partially protected by Microsoft RPS guarantees that run for the next four quarters, Yahoo officials said.

But the adCenter problems are impacting the global rollout of the Microsoft-Yahoo integration. "As Microsoft focuses on RPS improvement in the U.S., we're holding off on transitioning more paid search markets this year. We'll transition the remaining paid search markets once we believe the changes are in place to yield the right results for our advertisers," Bartz said.

Technology integrations of this magnitude are complex, and the Yahoo-Microsoft problems sound at this point like roadbumps rather than impassable barriers. But talk of Microsoft missing partnering benchmarks must be a little alarming for Stephen Elop over at Nokia.

Posted by Scott Bekker on April 20, 2011