Kara Swisher

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Exclusive: Yahoo's Bartz and Microsoft's Ballmer Finally Talking About Search and Advertising Partnership


In early discussions that began in the last several weeks that apparently included a face-to-face meeting last week, Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer are finally talking about search and also advertising partnerships the companies could possibly strike, said several sources with knowledge of the situation.

According to a variety of sources, the talks between the pair (pictured here) and other execs at both companies are preliminary and wide-ranging, focused on what kind of commercial relationship Yahoo and Microsoft could have in the future.

But, cautioned sources close to Yahoo, the discussions are not about a renewed acquisition attempt by Microsoft and also might not result in any deal.

In any case, investors will likely cheer any kind of productive re-engagement between Yahoo (YHOO) and Microsoft (MSFT), which has been lacking since a tense takeover effort by the software giant went south last year after an ugly battle that soured relations between the two companies.

“It’s long past time,” said one outsider who had been told of the discussions. “With Google’s huge market share, these two need to work together and the problems they had should be put in the past.”

Both Yahoo and Microsoft declined to comment about the talks.

The change in leadership at Yahoo has helped, especially since Bartz–a Silicon Valley veteran with much deal experience–has none of the baggage from the takeover battle that previous management was carrying.

Microsoft seems to have also moved on, working on a massive redesign and relaunch of its search brand, under the internal name Kumo, an effort that has included the hiring a whole lot of talent in the arena, mainly from Yahoo, in fact.

That includes Qi Lu, a former Yahoo tech star, who is leading all of Microsoft’s online efforts.

All of this means that a relatively green-field approach is now possible.

Thus, sources said, the talks include many scenarios, such as one in which the companies swap online advertising assets and deliver services to each other.

In that interesting plan, Yahoo might take over all of Microsoft’s display and premium advertising business to sell along with its own, while Microsoft would run the search advertising business for the pair.

Such a deal, which plays to each company’s strengths, would bind the two closely together, even though they still compete on many other fronts in the Internet space.

It also joins their forces, creating a sale that is much more attractive to advertisers and allows for better competition against search powerhouse Google (GOOG).

And while Ballmer has publicly said repeatedly that Microsoft is interested in buying either Yahoo’s search advertising business or search outright, sources close to Yahoo said the company is still determined to maintain control of the important search business and the massive traffic and critical data it provides.

That is especially true, given that Yahoo is the No. 2 player, with a much larger share than third-place Microsoft. According to recent surveys, for example, Google has a 63 percent share, while Yahoo has 20.6 percent and Microsoft eight percent.

But it is also in Yahoo’s interest to move fast, since its search traffic could be declining soon.

According to a story by Dow Jones yesterday, citing a comScore (SCOR) report, recent toolbar distribution deals with computer makers Hewlett-Packard (HPQ) and Acer by Microsoft and Google respectively, will have a negative impact on Yahoo.

The story said that Yahoo “could lose up to 15% of its search traffic over the next 12-to-18 months after failing to renew deals with two computer makers, blows likely to hamper the Internet giant’s efforts to remain a viable competitor in search advertising.”

But even as he directs aggressive moves to put even more competitive pressure on Yahoo, Ballmer has been unusually deferential in giving Bartz a lot of time to come to the table.

Nonetheless, he cannot seem to stop talking about it either.

At a recent conference in mid-March, for example, Ballmer said:

“It’s really about getting the pooled volume, because you actually can improve your product faster if you have more users….If you have more advertisers, you can improve the product as well….There are returns to scale. And putting the scale together is valuable.”

But, in that interview, Ballmer also said that he had only talked to Bartz briefly since she was hired in January–congratulating her on the new job and mentioning that he’d love to talk about a deal.

And, at another meeting with Wall Street analysts earlier, he went even further:

“You all know that I would like to figure out how to pool somehow Microsoft and Yahoo. I’m not talking about doing an acquisition, blah, blah, blah, back to search deals, blah, blah, blah, I don’t know if anything is going to happen. I’ll short-circuit the whole conversation, but the fact of the matter is, these two guys [Microsoft and Yahoo] should somehow figure out how to get together and create more competition for this guy [Google]. And I’m hoping perhaps that that’s a reasonable conversation to have with new management at Yahoo as Carol comes onboard.”

In contrast, Bartz has played her hand very close to the vest so far, at least publicly, often discounting any effort to split up Yahoo.

In fact, at a Morgan Stanley (MS) tech conference in early March, she said:

“I am not going to negotiate with my 55,000 favorite friends….We’re going to negotiate as companies negotiate–and that’s privately. If something happens, you’ll know it then. Until then, there is no comment.”

(By the way, both Ballmer and Bartz have agreed to be interviewed onstage–separately, of course–at the D: All Things Digital conference in late May that Walt Mossberg and I run–so we will be sure to try to get one–not that they would give one!)

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