Diller Likes the Microsoft-Yahoo Deal

Yahoo! (YHOO) shareholders may not be cheering the July 29 announcement that the company and Microsoft (MSFT) are teaming up to create a joint search engine to take on Google (GOOG). But the new deal has a big fan in Internet mogul Barry Diller and his IAC/InterActiveCorp (IACI). "For one thing," he told analysts in an earnings conference call, "we no longer have to worry about whether they will do it or not." Better yet, his company gets a ton of money from Google for paid advertising on his search engines, and he just got a potential new bidder when the deal expires in three years. "We do better when there are two big competitive forces out there."

Diller admits that IAC's various search engines are a distant third to Google, which has about 65% of the U.S. search-engine market, according to ComScore, and the new Microsoft-Yahoo combination, which would have 28%. But its financials say that IAC has profited even from its third place status. Last year it got a hefty $610.8 million, or about 40% of its $1.4 billion in revenues, from Google for paid advertising running alongside searches on its and other search engines

The revenue from Google has been increasing, from $379 million in 2006, but the agreement with the search engine leader is scheduled to expire on Dec. 31, 2012, IAC reports in its financials. Diller said "the plot" right now is for IAC to boost the value of its searches—making it even more crucial to consumers—in order to stoke a bidding war with what he expects to be two hungry competitors by then. "I want to have two players out there," he said during his conference call. "That's good for all parties."

Search Expansions Diller took some shots at Microsoft's new Bing search engine, which he said has incorporated many of the changes that Ask had made in creating its own search engine—things such as offering up user-generated content, social communities, and even original content for searches compared with what he called "dry searches" from other competitors. He said that IAC will continue to expand its searches by creating new search areas and "will continue to roll out areas we can offer consumers much richer search areas than our competitors." The company last year bought, which also offers searches, providing them through a toolbar offered by its FunWeb Products.

Meanwhile, investors were moderately cheered by IAC's earnings announcement, sending its stock up 0.39%, to 17.98, in midday trading after the company announced second quarter net income of $40.8 million despite a 4% decline in revenues, to $340 million. (Earnings are not comparable with last year, which included losses from discontinued operations following IAC's spin-off of five companies, including Ticketmaster and the HSN electronic shopping network.) The company showed its biggest bump in operating growth at its dating site, where operating income jumped 45% on the basis of a 9% hike in U.S. subscribers to its service. The site currently has nearly 1.2 million subscribers paying about $30 a month.

Diller was vague on plans for the joint venture with former NBC Entertainment Co-Chairman Ben Silverman to create video content, which the company announced on July 27. The deal, he stressed, was still a month away from being completed, and details still needed to be ironed out, but he stressed that he expected advertisers would probably pay most—if not all—of the costs of creating the online and, perhaps, TV content that the venture anticipates. That would alter the current model, in which distributors such as cable channels pay a fee to producers, with the distributors then selling ads to recover their costs and generate profits.

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