Update: Microsoft signs search deal with Yahoo

IDG News Service - Microsoft Corp. and Yahoo Inc. today announced a long-anticipated search deal that calls for Microsoft's Bing search engine to power Yahoo's search site, and for Yahoo to sell premium search advertising services for both companies.

The deal, which took nearly a year and a half to work out and started with an unsolicited bid by Microsoft to buy Yahoo in February 2008, is aimed at giving the two companies leverage against search giant Google Inc., which leads the market in search-driven online advertising revenues.

According to the companies, the combined forces of their search teams and assets will accelerate the pace and breadth of innovation to make them more competitive players in the search market.

The deal comes about two months after Microsoft revamped its search engine and relaunched it as Bing, which has already been taking share from Yahoo's search engine and has gotten early positive user reviews, according to analysts. For its part, Yahoo has a larger network of advertisers than Microsoft, and Microsoft will benefit now by having access to them.

The agreement -- which covers search only -- is a 10-year deal that gives Microsoft an exclusive license to Yahoo's core search technologies as well as the ability to integrate them into Bing, the companies said.

Bing will be the exclusive algorithmic search and paid search platform for Yahoo sites, but Yahoo will continue to use its technology and data in other areas of its business, in particular its display advertising. In fact, the companies said that they will each continue to maintain their own separate display ad businesses and sales forces.

Yahoo's sales force will have direct relationships with both companies' premium search advertisers, while the self-service ad platform for both companies will be Microsoft' AdCenter, which will continue to set prices for the automated auction process.

Compensation for Yahoo will come through a revenue-sharing agreement based on traffic generated on Yahoo's network of owned and operated as well as affiliate sites, the companies said.

Specifically, Microsoft is agreeing to pay Yahoo traffic acquisition costs at an initial rate of 88% of search revenue generated on owned and operated sites during the first five years of the agreement. Yahoo will continue to syndicate its existing search affiliate partnerships, the companies said.

Microsoft will guarantee Yahoo's owned-and-operated revenue per search in each country for the first 18 months following the initial implementation in that country.

After full implementation, which the companies expect will come about two years after regulatory approval, Yahoo expects the agreement will generate about $500 million in operating income and a savings of about $200 million in capital expenditures. The company also expects it will add $275 million to annual operating cash flow.