Revealed: The Costs of Microsoft’s Yahoo Deal

By  |  Friday, July 31, 2009 at 5:43 pm

BinghooRumor has it that Microsoft CEO Steve Ballmer, flummoxed over press leaks, decreed that password protection be added to Office 2003. Ironically, Ballmer inadvertently detailed the transition costs of the company’s ten year search deal with Yahoo during his presentation at the Microsoft’s Financial Analyst Meeting (FAM) yesterday.

A slide marked “not for disclosure” found its way into the CEO’s PowerPoint deck. The slide itemized $675 million in transition costs, and revealed that Microsoft expects to absorb a $300 million loss during the first two years of the deal. Over time, the company expects to begin earning a “decent return” of “$400 million steady-state.”

The cost breakdown is: $90 million in retention costs, $170 million in R&D costs for paid search, $145 million for Cost of Goods Sold (hosting costs), $150 million in sign-on costs, $70 million for search algorithm R&D, and $50 million for advertiser migration.

The costs could conceivably have been disclosed in annual reports as a footnote or rolled up into other costs, but under SEC rules, Microsoft is allowed to be vague in its forecasts. I also don’t see why revenue would have to be reported separately for the partnership. Ballmer might be big on passwords, but there is no accounting for human error.

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