Yahoo, Microsoft to Finally Partner on Search?

bingYahoo (s yhoo) and Microsoft (s msft) are very close — a year and a half after Microsoft went public with its buyout offer for the beleaguered web giant — to inking a search deal. AdAge’s Michael Learmonth reports that an agreement is likely to be announced this week, and would solidify Bing’s No. 2 position behind Google (s goog). The deal, as it’s understood now, would allow Yahoo to dump it’s OK-but-not-great search engine in favor of Bing’s, saving on infrastructure and R&D costs. Searches on would remain Yahoo branded (though perhaps with a “powered by Bing” notation).

Here’s where things get really interesting: The companies would split the revenue from search ads on Yahoo results pages, but Yahoo would also be able to sell search ads on, giving it much more search inventory to sell and making it a solid player against Google. It has been difficult for Yahoo to compete against Google’s massive “long tail” on more obscure, but more targeted, search queries.

Yahoo reportedly wants an upfront payment in the hundreds of millions of dollars, in addition to revenue guarantees in the billions over the course of the deal. Microsoft would prefer just the guarantees, with a smaller initial payment or even no upfront cash. The companies are also said to clashing over how search ad revenue would get split, and whether Bing gets to be branded on Yahoo the way its other search partners have in the past. They’re also reportedly still haggling over the amount of search data Yahoo would receive to assist with its behavioral targeting.

According to comScore, Microsoft had an 8.4 percent share of the U.S. search market in June, with Yahoo grabbing 19.6 percent. Based on those numbers, a combined Bing/Yahoo engine would claim 28 percent of the market 28 percent vs. Google’s 65 percent — making the consolidated search platform a legitimate competitor.