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Summary:

Microsoft and Yahoo have reached an agreement on a search deal that will allow both companies to focus on their core strengths: Microsoft’s Bing will become the default search engine on Yahoo.com, and Yahoo will eventually take over the ad inventory on all Bing search results, eliminating complexity for advertisers (and internal overhead).

yahoobingUpdated: Microsoft and Yahoo have reached an agreement on a 10-year search deal, AdAge is reporting. The agreement , which they plan to announce tomorrow, will allow both companies to focus on their core strengths: Microsoft’s Bing will become the default search engine on Yahoo.com, and Yahoo will eventually take over the ad inventory on all Bing search results, eliminating complexity for advertisers (and internal overhead).

The Department of Justice still needs to sign off on the deal, but executives of Microsoft and Yahoo are reportedly confident that will ultimately happen. The agreement will probably take months to finalize, but since Google currently claims 65 percent of U.S. searches, and Yahoo and Microsoft 19.6 and 8.4 percent, respectively, the sooner they can start to catch up, the better.

From Microsoft’s press release, the key terms of the agreement:

  • The term of the agreement is 10 years; Microsoft will acquire an exclusive 10 year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms;
  • Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.
  • Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process.
  • Each company will maintain its own separate display advertising business and sales force.
  • Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology.
  • Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites.
  • Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!’s O&O sites during the first 5 years of the agreement.
  • Yahoo! will continue to syndicate its existing search affiliate partnerships.
  • Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.
  • At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

And from the conference call:

Neither Yahoo CEO Carol Bartz nor Microsoft CEO Steve Ballmer mentioned Google by name. Instead, Bartz explained, with this deal, the two companies can offer a “viable alternative,” with better searches and more relevant ads for users, and better reach for publishers.

The word “choice” was used a lot. The companies have launched a web site, ChoiceValueInnovation.com, to showcase for investors the benefits of the deal. Its tagline reads: “Real Choice. Better Value. More Innovation.”

Layoffs are indeed on the horizon, Bartz said, but most employees — especially in search — will simply move to Microsoft.

When asked about the differences between this deal and the one proposed last year, Bartz cited the lack of an upfront payment this time around, but the inclusion of ongoing payments. “We’re trying to run a long-term business here,” she said.

Microsoft general counsel Brad Smith says the filing process with U.S. and EU antitrust organizations will get under way next week.

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  1. Finally! At least we’re getting some semblance of competition to Google :)

  2. Google got it’s lead with a superior product – interesting how Microsoft always has to purchase it’s competitive ability.

    1. Considering Yahoo is looking to use Bing to power their search, and Bing was homegrown at Microsoft, this comment doesn’t make a lot of sense…Google search is up against Bing search and neither of those technologies were acquired.

      As for other products/services, Google has had plenty of aquisitions (Keyhole, Picasa, YouTube, Blogger, DoubleClick, Grand Central, etc.)

  3. @tom ward: aside from making meaningful comments, you should learn how to spell; it’s ”its” not ”it’s” – twice.

  4. It will be interesting to see if they will actually be a serious competition to Google.

    1. I can already see that happening. Bing is producing better results for me. I’m a web developer and I’m surprised with what I see – better accuracy – which basically means, more meaningful results.

    2. They’ve done a good job with non-tech people. I know a lot of non-technical people who prefer Bing. I don’t think that GigaOM readers are their main target- it seems like they’re going after the people who don’t know the difference between a search engine and an OS and a browser.

  5. this is interesting and i do believe bing is a serious competitor to google’s dominance to search lets wait and watch how this deal works out

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  8. Folks working in Yahoo’s search related groups are bound to be affected by this. Wonder what will happen there?

    1. carol bartz mentioned on the conference call that there were going to be redundancies etc. nice way of saying people are going to leave.

  9. Hmmm .. I don’t think of Bing as a serious competitor for Google.Millions of people have google as their default search engine and migration from one service to another is impossible for many users who fall into the inexorable category of ‘Let’s just keep it as it is’.The users in this category are the same people who are hesitant on shifting to Firefox from IE6,and doing many such ameliorations.
    The search deal between Yahoo and Microsoft is nothing but increasing the presence of Bing on the web.The only thing this would lead to is the presence of only two entities in the search engine war with Google still having a higher share.The reported increasing user share of Bing is just due to the high number of curious users and testers on the web and in the long run Google is the winner.

    1. The forthcoming computer upgrade cycle driven by Windows 7 could make a huge difference.

      If Bing is good enough that people don’t switch over on new computers when they come out of the box (i.e. in IE8), that could shift significant market share in the next few years.

      New platform = new opportunity.

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