Yahoo 2010 Annual Report Download - page 107

Note 16 S EARCH A GREEMENT W ITH M ICROSOFT C ORPORATION
On December 4, 2009, the Company entered into the Search Agreement with Microsoft, which provides for
Microsoft to be the exclusive algorithmic and paid search services provider on Yahoo! Properties and non-
exclusive provider of such services on Affiliate sites. The Company also entered into a License Agreement with
Microsoft. Under the License Agreement, Microsoft acquired an exclusive 10-year license to the Company’s core
search technology and will have the ability to integrate this technology into its existing Web search platforms.
The Company received regulatory clearance from both the U.S. Department of Justice and the European
Commission on February 18, 2010 and commenced implementation of the Search Agreement on February 23,
2010. Under the Search Agreement, the Company will be the exclusive worldwide relationship sales force for
both companies’ premium search advertisers, which include advertisers meeting certain spending or other
criteria, advertising agencies that specialize in or offer search engine marketing services and their clients, and
resellers and their clients seeking assistance with their paid search accounts. The term of the Search Agreement is
10 years from February 23, 2010, subject to earlier termination as provided in the Search Agreement.
During the first five years of the term of the Search Agreement, in the transitioned markets the Company is
entitled to receive 88 percent of the revenue generated from Microsoft’s services on Yahoo! Properties (the
“Revenue Share Rate”) and the Company is also entitled to receive 88 percent of the revenue generated from
Microsoft’s services on Affiliate sites after the Affiliate’s share of revenue is deducted. For new Affiliates during
the term of the Search Agreement, and for all Affiliates after the first five years of such term, the Company will
receive 88 percent of the revenue generated from Microsoft’s services on Affiliate sites after the Affiliate’s share
of revenue and certain Microsoft costs are deducted. On the fifth anniversary of the date of implementation of the
Search Agreement, Microsoft will have the option to terminate the Company’s sales exclusivity for premium
search advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93 percent for the
remainder of the term of the Search Agreement, unless the Company exercises its option to retain the Company’s
sales exclusivity, in which case the Revenue Share Rate would be reduced to 83 percent for the remainder of the
term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90 percent for the remainder of
the term of the Search Agreement. In the transitioned markets, the Company reports as revenue the 88 percent
revenue share as the Company is not the primary obligor in the arrangement with the advertisers and
publishers. The underlying search advertising services are provided by Microsoft. As of December 31, 2010, the
Company has collected a total amount of $93 million on behalf of Microsoft and affiliates, which is included in
cash and cash equivalents as of December 31, 2010, with a corresponding liability in accrued expenses and other
current liabilities, that the Company will remit to Microsoft in the first quarter of 2011. The Company’s
uncollected 88 percent revenue share in connection with the Search Agreement was $172 million as of December
31, 2010.
The global transition of the algorithmic and paid search platforms to Microsoft’s platform and migration of the
paid search advertisers and publishers are being done on a market by market basis and are expected to continue
through early 2012. Algorithmic and paid search transitioned to the Microsoft platform in the U.S. and Canada in
the fourth quarter of 2010, and the Company continues to transition algorithmic and paid search in other markets.
Microsoft has agreed to reimburse the Company for certain transition costs up to an aggregate total of $150
million during the first three years of the Search Agreement. From February 23, 2010 until the applicable
services are fully transitioned to Microsoft, Microsoft will also reimburse the Company for the costs of running
its algorithmic and paid search services subject to specified exclusions and limitations. These search operating
cost reimbursements and certain employee retention costs are separate from and in addition to the $150 million
of transition cost reimbursement payments.
The Company’s results for the year ended December 31, 2010 reflect $268 million in search operating cost
reimbursements from Microsoft under the Search Agreement. Search operating cost reimbursements began
during the quarter ended March 31, 2010 and will continue until the Company has fully transitioned to
Microsoft’s platform.
105