Microsoft acquisition of Yahoo search will include 400+ employees

The real acquisition of Yahoo's search interests by Microsoft may have begun in earnest in December 2008, when Microsoft hired Dr. Qi Lu, the architect of Yahoo's search-driven advertising platform, appointing him to the very prominent role of President of Online Services. Now, according to a just released US Securities and Exchange Commission filing by Yahoo dated last Wednesday, under the agreement between the two companies, Microsoft will transition no fewer than 400 Yahoo employees from its search technologies departments to Microsoft, offering them competitive salaries; and in addition, will assist in the compensation of as many as 150 other Yahoo employees who will assist in the transition.

"Following the Commencement Date [July 29], Microsoft will hire not less than 400 Yahoo employees (the 'Transferred Employees') and will offer the Transferred Employees market competitive compensation packages," Yahoo's SEC filing reads. "In addition, Yahoo and Microsoft will mutually agree on a retention plan to be paid for by Microsoft to assist in retaining the Transferred Employees and an additional 150 Yahoo employees to be mutually agreed upon between Microsoft and Yahoo to assist with providing the transition services."

The agreement makes it clear that Yahoo's plan will be to implement search algorithms belonging to Microsoft for powering Yahoo services, for which Microsoft will receive only 12% of the advertising revenue for the first five years of the deal. Yahoo is given the right to terminate the agreement if the revenue it earns from US-based searches -- its 88% of the bargain -- falls below a specified amount relative to what Google earns per search (known only to the two parties for now), or if the combined usage share of Microsoft and Yahoo searches in the US falls below a specified level relative to Google (again, known only to Yahoo and Microsoft).

But although the transition plan specifically refers to Yahoo's adoption of "Microsoft's algorithmic search services," it does not actually state that in so doing, Yahoo will end up using the same algorithms previously used on Windows Live and now on Bing. It merely indicates that Microsoft will provide the service. This is important, because the genesis of Yahoo's own search algorithms (which many believe are superior to Microsoft's) is creditable to the 400-plus employees that Microsoft will be acquiring, along with Dr. Lu who is already in place.

So while Microsoft will be providing the service and receiving what some would call a "stipend," the door appears to be left open for Microsoft to provide that service to Yahoo using not only the people who provided that service to Yahoo previously, but their intellectual property as well. However, the agreement makes clear that Yahoo's technology may not be used for Bing.

As Yahoo's SEC filing also reads, "During the Term [of the Agreement], Yahoo will grant to Microsoft a worldwide license (the 'Technology License') under copyrights and trade secrets relating to specified Yahoo algorithmic and paid search technology for Microsoft to use in connection with providing specified algorithmic search, paid search and contextual advertising services (the 'Field of Use'). The Technology License will be exclusive (even as to Yahoo) as to certain algorithmic search and paid search services in the Field of Use. Upon termination or expiration of the Search Agreement, the Technology License will remain in effect but will become non-exclusive."

The "Patent Cross-License" section of the statement goes on to say that while Yahoo grants Microsoft a license to use Yahoo's patents in search technology, that license is "solely for Microsoft to provide services in the Field of Use to Yahoo." Nonetheless, it's conceivable that Microsoft could utilize what it learns from providing Yahoo's algorithms to Yahoo, using Yahoo's former staff, to create a next generation of search algorithm for potential use by both Bing and Yahoo.

Throughout 2008, statements from Microsoft CEO Steve Ballmer and his staff made it clear that Microsoft was interested in integrating Yahoo's staff, but not its technology. Historians may take note of Ballmer's tactics for years to come, specifically how by paying little respect to Yahoo's technology, he drove down its value -- and thus, its asking price. Now, Ballmer not only has access to that technology, but Dr. Lu's experience to disseminate what it means and how it's used. And even if Microsoft can't put Yahoo's algorithms to work for Bing, it may now have a leg up on how it can improve or even replace Bing's algorithms in the future. It was an extremely clever ploy, and perhaps it will be a successful one.

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