Yahoo 2013 Annual Report Download - page 45

existing Web search platforms. The global transition of our algorithmic and paid search platforms to Microsoft’s
platform and the migration of paid search advertisers and publishers to Microsoft’s platform were to be done on a
market by market basis.
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. The underlying search advertising services are provided by
Microsoft. For new Affiliates during the term of the Search Agreement, and for all Affiliates after the first five
years of such term, we 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. Under the Search Agreement,
Yahoo is the exclusive worldwide relationship sales force for both companies’ premium search advertisers. On
February 23, 2015 (the fifth anniversary of the date that implementation of the Search Agreement commenced),
Microsoft will have the option to terminate our 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 we exercise our option to retain our 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.
The term of the Search Agreement is 10 years from February 23, 2010, subject to earlier termination as provided
in the Search Agreement. Revenue under the Search Agreement represented approximately 20 percent,
25 percent, and 31 percent of our revenue for the years ended December 31, 2011, 2012 and, 2013, respectively.
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. The RPS Guarantee is based on the difference in revenue per search between
the pre-transition and post-transition periods and certain other factors. 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. In the fourth quarter of 2011, Microsoft agreed to extend the RPS Guarantee in
the U.S. and Canada through March 2013, and in the second quarter of 2013, Microsoft extended the RPS
Guarantee in the U.S. through March 2014. In June 2013, Microsoft and we agreed upon the RPS Guarantee
payment amounts to be paid to us for the quarters ended December 31, 2012, March 31, 2013 and June 30, 2013.
We also agreed to fixed quarterly payments in lieu of the RPS Guarantee in the U.S. for the quarters ending
September 30, 2013, December 31, 2013 and March 31, 2014. In addition, we agreed to waive our right to
receive any future RPS Guarantee payments in all other markets except Taiwan and Hong Kong. We do not
expect the remaining quarterly payment from Microsoft and any RPS Guarantee payments for Taiwan and
Hong Kong to have a material impact on our expected future revenue.
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 incurred in excess of the $150 million reimbursement cap were not subject to reimbursement.
Our results for the year ended December 31, 2011 reflect the final transition cost reimbursements from Microsoft
under the Search Agreement of $26 million.
We completed the transition of our algorithmic and paid search platforms to the Microsoft platform in the U.S.
and Canada in the fourth quarter of 2010. In 2011, we completed the transition of algorithmic search in all other
markets. By the end of 2012, we had completed the transition of paid search in India, most of the EMEA
markets, and six markets in Latin America. By the end of 2013, we had substantially completed the transition of
paid search, including the transition of paid search in Taiwan and Hong Kong.
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