Microsoft, Yahoo link up in Internet search deal

Microsoft and Yahoo have finally struck a deal to take on giant rival Google.

The 10-year partnership, announced Tuesday, will combine technologies, revenue sharing and ad search sales staff for the two tech and ad giants.

The two competitors paired up to better challenge Google, which has 88% of the search market business. Ad search is the biggest chunk of the $23.4 billion Internet ad business and accounted for 45%, or $10.5 billion, last year, according to the Internet Advertising Bureau. That's a 20% increase at a time when ad when advertising was down 2.6%

At the core of the deal is Bing, Microsoft's new search engine, unveiled in May. The positive response to Bing helped pave the way for the deal, says Microsoft CEO Steve Ballmer.

"If Bing was not good, I bet we would not have a partnership," he says.

Yahoo CEO Carol Bartz says the combined market reach of Yahoo and Microsoft will eventually serve consumers well with improved search results and more relevant ads. "It all sounds like a win for consumers and advertisers to me," Ballmer said.

Bartz said she isn't concerned about a 11% drop in Yahoo shares this morning. "I'm not a CEO who believes in short-term things," she says. "I believe this will play out well in the long run. It's hard to give a report card on (this year) based on half a day of trading."

Search advertising, those pesky little text ads that pop up when you search for a term, business or topic are considered the holy grail of advertising. If a consumer clicks on them they present timely, relevant ads. Google dominates that market.

"The hope (for Microsoft and Yahoo) is that better technology will mean more relevant results and more relevant results will attract more users," says David Hallerman, senior analyst with eMarketer. "More users mean more potential to click on ads and that means more money."

Terms of the deal include:

• Microsoft has a 10-year exclusive license to Yahoo's search technologies and will be able to integrate Microsoft's search technology into Microsoft's existing Web search platforms.

• Microsoft's new Bing search technology will the exclusive paid and algorithmic search platform for Yahoo sites.

•Yahoo will operate the exclusive worldwide sales force for both companies search ad services. Each will maintain their own display sales teams.

Hallerman says that in order to continue to generate audiences Microsoft will have to invest heavily in its advertising for Bing.

Microsoft believes Bing is just as good, if not better, than Google's search engine. Taking over the search responsibilities on Yahoo's highly trafficked site gives Microsoft a better chance to convert Web surfers who had been using Google by force of habit.

In return for turning over the keys to its search engine, Yahoo will get to keep 88% of the revenue from all search ad sales on its site for the first five years of the deal, and will have the right to sell ads on some Microsoft sites.

Yahoo estimated the deal — which the companies hope to close next year — will boost its annual operating profit by $500 million and save the Sunnyvale, Calif.-based company about $275 million on capital expenditures a year because it won't have to invest in its own search technology.

Assuming it can pass antitrust scrutiny, the alliance could give Yahoo a chance to recoup some of the money squandered in May 2008, when it turned down a chance to sell the entire company to Microsoft for $47.5 billion.

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