Yahoo 2010 Annual Report Download - page 35

Search Agreement with Microsoft Corporation
On December 4, 2009, Yahoo! entered into the Search and Advertising Services and Sales Agreement (“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. Under the
Search Agreement, Yahoo! 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 global transition to Microsoft as the exclusive
algorithmic and paid search services provider on Yahoo! Properties and non-exclusive provider of such services
on Affiliate sites are being done on a market by market basis and are expected to continue through early 2012.
The transition occurred in the United States (“U.S.”) and Canada in the fourth quarter of 2010, and we continue
to transition algorithmic and paid search in other markets. The Search Agreement terminates in February 2020,
subject to earlier termination as provided in the Search Agreement.
Under the Search Agreement, Microsoft has agreed to reimburse us 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 us for the costs of running
our 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.
Our 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 will continue until we
complete the transition to Microsoft’s platform in all markets. Search operating cost reimbursements are
expected to decline as we fully transition all markets and the underlying expenses will no longer be incurred
under our cost structure following completion of the transition and the amounts saved will be available for
reinvestment.
Our results for the year ended December 31, 2010 also reflect transition cost reimbursements from Microsoft under
the Search Agreement, which were equal to the transition costs of $81 million incurred by Yahoo! related to the
Search Agreement in the year ended December 31, 2010. In addition, in the year ended December 31, 2010, we
recorded $43 million for reimbursement of transition costs incurred in 2009, $17 million for employee retention
costs incurred in 2010, and $5 million for employee retention costs incurred in 2009. The 2009 transition cost
reimbursements were recorded in 2010 after regulatory clearance in the U.S. and Europe was received,
implementation of the Search Agreement commenced, and Microsoft became obligated to make such payments.
We record receivables for the reimbursements as costs are incurred and apply them against the operating expense
categories in which the costs were incurred. As of December 31, 2010, we had incurred a total of $414 million of
reimbursable expenses related to the Search Agreement. Of that amount, $350 million had been received from
Microsoft, and $64 million was classified as part of prepaid expenses and other current assets on our consolidated
balance sheets as of December 31, 2010. The $64 million of reimbursements were received during the first
quarter of 2011.
During the first five years of the Search Agreement, in transitioned markets we are entitled to receive 88 percent
of the revenue generated from Microsoft’s services on Yahoo! Properties and we are also entitled to 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. In the transitioned markets, for search revenue generated from
Microsoft’s services on Yahoo! Properties and Affiliate sites, we report as revenue the 88 percent revenue share,
as we are not the primary obligor in the arrangement with the advertisers.
As a result of the required change in revenue presentation and the revenue share with Microsoft, our revenue and
traffic acquisition costs for the first quarter of 2011 are expected to be lower than these amounts would otherwise
have been by approximately $207 million and $171 million, respectively.
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