The Yahoo-Microsoft (NSDQ: MSFT) talks have been one of the great soap operas of the internet world over the past year. But Jeffries & Company analyst Youssef H. Squali believes that the likelihood of a deal between the two powerhouses (Yahoo (NSDQ: YHOO) would outsource its search operations to Microsoft and sells Microsoft's display ad inventory) is now real enough that it's time to crunch the numbers. Here are the financial benefits for Yahoo, as he sees them.
—Outsourcing its search operations would save Yahoo $1 billion to $1.3 billion in costs. With the long-term importance of search, Squali points out that Yahoo would be smart to retain the right to take its search operations back at some point and to use its search data for better display-ad targeting.
—Given Microsoft's $300 million to $400 million in display revenue during the fourth quarter 2009 and an assumed 50/50 revenue share , Squali estimates Yahoo would earn about $600 million to $800 million in extra revenue a year -. (But he concedes that the display market may be no better in 2009 than it was in the fourth quarter of 2008).
The bottom line: Yahoo would net about $2 billion in extra profit per year. For comparison this would represent a little less than one-third of Google's operating income in 2008. Squali also points out that Microsoft's additional display inventory would make Yahoo the largest display network online, which would enable it to increase CPMs. But it's unclear if more inventory would actually meaningfully increase CPMs since advertisers tend to pay more of a premium for targeting rather than scale.