Yahoo 2011 Annual Report Download - page 39

Strategic Review
During 2011, our Board of Directors initiated a comprehensive strategic review to assess alternatives to return
the Company to increased growth and innovation. As part of this review, we have pursued a wide range of
discussions with potential partners. We are in discussions regarding the possibility of restructuring our holdings
in Alibaba Group and Yahoo Japan. While we continue to pursue these discussions, there is no assurance that any
transaction will be achieved.
Search Agreement with Microsoft Corporation
On December 4, 2009, we entered into a Search and Advertising Services and Sales Agreement (the “Search
Agreement”) with Microsoft Corporation (“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. We also entered into a License Agreement with Microsoft pursuant to which Microsoft
acquired an exclusive 10-year license to our core search technology that it will be able to integrate into its
existing Web search platforms.
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. 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. 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 and publishers.
Under the Search Agreement, for each market, Microsoft generally guarantees Yahoo!’s revenue per search
(“RPS Guarantee”) on Yahoo! Properties only for 18 months after the transition of paid search services to
Microsoft’s platform in that market. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee
in the U.S. and Canada through March 2013. The RPS Guarantee is calculated based on the difference in revenue
per search between the pre-transition and post-transition periods. We record the RPS Guarantee as search
revenue in the quarter the amount becomes fixed, which is typically the quarter in which the associated shortfall
in revenue per search occurred.
Under the Search Agreement, Microsoft 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. During the third quarter of 2011, our
cumulative transition costs exceeded Microsoft’s $150 million reimbursement cap under the Search Agreement.
Transition costs we incur in excess of the $150 million reimbursement cap are not subject to reimbursement. Our
results for the year ended December 31, 2011 reflect transition cost reimbursements from Microsoft under the
Search Agreement of $26 million. During the year ended December 31, 2010, we recorded transition cost
reimbursements from Microsoft under the Search Agreement of $81 million. During the year ended
December 31, 2010, we also recorded reimbursements of $43 million for transition costs incurred in 2009. The
2009 transition cost reimbursements were recorded in the first quarter of 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.
From February 23, 2010 until the applicable services are fully transitioned to Microsoft in all markets, Microsoft
will also reimburse us for the costs of operating algorithmic and paid search services subject to specified
exclusions and limitations. Our results reflect search operating cost reimbursements from Microsoft under the
Search Agreement of $212 million for the year ended December 31, 2011 and $268 million for the same period
of 2010. The global transition of the algorithmic and paid search platforms to Microsoft’s platform and the
migration of the paid search advertisers and publishers to Microsoft’s platform are being done on a market by
market basis. Search operating cost reimbursements are expected to decline as we fully transition all markets and,
in the long term, the underlying expenses are not expected to be incurred under our cost structure.
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