UPDATED: Yahoo, Microsoft Ink Search Deal

yahoobingUpdated: Microsoft (s msft) and Yahoo (s yhoo) 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.
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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.