Microsoft-Yahoo search deal: update

Microsoft and Yahoo have signed a search deal, under which Microsoft Bing will power Yahoo's search site, and Yahoo will sell premium search advertising services for both companies.

The deal, which took nearly a year and a half to strike and started with an unsolicited bid by Microsoft to buy Yahoo last February, is aimed at giving the two companies leverage against search giant Google.

Under the terms of the agreement, Microsoft will acquire an exclusive 10 year licence to Yahoo!'s core search technologies, and Microsoft will have 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, each company will continue to maintain its own separate display ad business and sales force, they said.

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.

Microsoft will compensate Yahoo through a revenue sharing agreement based on traffic generated on Yahoo!'s network of both owned and operated and affiliate sites.

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

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.

Yahoo estimates the agreement will generate approximately $500 million in operating income of and savings of about $200 million in capital expenditures within two years after implementation. These figures are based on current levels of revenue and current operating expenses. The search giant also expects that this agreement will add $275 million to annual operating cash flow.

"This agreement comes with boatloads of value for Yahoo!, our users, and the industry. And I believe it establishes the foundation for a new era of Internet innovation and development," said Yahoo! CEO Carol Bartz.

"Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities, and mobile experiences."

Microsoft CEO Steve Ballmer said: "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo! know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search."

Siobhan Chapman, Peter Sayer and Elizabeth Montalbano contributed to this report

More to come

Copyright © 2009 IDG Communications, Inc.

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