Yahoo, Microsoft reach search, ad deal

Under the pact, Microsoft's technology will power Yahoo's search results, while Yahoo will handle ad-selling duties for both companies' search sites.

Ina Fried Former Staff writer, CNET News
During her years at CNET News, Ina Fried changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley.
Ina Fried
3 min read
Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer tout the deal.
Microsoft CEO Steve Ballmer uses a giant pen to sign the 10-year deal, alongside Yahoo CEO Carol Bartz, on Wednesday at Yahoo's headquarters in Sunnyvale, Calif. Yahoo/Microsoft

After months of fits and starts, Microsoft and Yahoo on Wednesday announced a 10-year search deal that will see the two companies join forces to take on Google.

"In simple terms, Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies' premium search advertisers," the companies said in a joint statement. The deal is expected to go into effect in 2010 and improve Yahoo's profitability, though not its revenue, the companies said.

Less expansive than the all-out, $44 billion acquisition Microsoft proposed last year--and even than some of the search partnerships once discussed--the deal does allow the companies to share resources and combine their engineering efforts. Even together, however, the two companies have only about 30 percent of the search market compared to Google, which has more than twice that amount.

"This agreement gives us the scale and resources to create the future of search," Microsoft CEO Steve Ballmer said in a statement. "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."

Yahoo CEO Carol Bartz, meanwhile, said that the move will help Yahoo focus on other areas, also adding that the deal has the full support of the company's board (lest anyone wonder what Carl Icahn thinks about the more limited deal).

"This is a significant opportunity for us," Bartz said. "Microsoft is an industry innovator in search and it is a great opportunity for us to focus our investments in other areas critical to our future."

Editors' note: The two companies had a conference call Wednesday morning to discuss the deal. Click here for our live-blog coverage of that event.

The dollar value
As for the financial terms, there is not the large upfront payment once discussed. However, Microsoft will offer both revenue guarantees to Yahoo as well as the lion's share of the search-advertising revenue generated on Yahoo's site.

That apparently wasn't enough to satisfy investors. In trading before the market opened, Yahoo's stock dropped more than 7 percent, or $1.28, to $15.94. Microsoft rose 1 percent, or 24 cents, to $23.71.

Yahoo will get 88 percent of search revenue created by its sites during the first five years, while Microsoft will guarantee a certain level of search revenue for 18 months in each country. The companies expect it will take about two years after the deal is approved to fully get the partnership up and running.

Once fully in place, Yahoo said it expects the deal will boost its annual operating income by about $500 million, while reducing capital expenditure by $200 million and increasing operating cash flow by about $275 million per year.

Microsoft will be able to incorporate Yahoo's search technology, including its Panama ad-selling tool, but the companies will use Microsoft's AdCenter sales tool and Bing search engine to power both sites.

Aiming to head off privacy concerns, the two companies noted that "the agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies."

The deal must still pass regulatory muster and the two companies anticipate it will take several months to finalize. "Microsoft and Yahoo expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions," the companies said. "The companies are hopeful that closing can occur in early 2010."

Microsoft and Yahoo are joining forces in search, but in a line clearly aimed at regulators, the companies take pains to note that their collaboration is limited to that arena.

"The agreement does not cover each company's Web properties and products, e-mail, instant messaging, display advertising, or any other aspect of the companies' businesses," they said. "In those areas, the companies will continue to compete vigorously."