Microsoft And Yahoo Conclude Search Deal, Finally

It took more than a year, but Microsoft and Yahoo have finally reached a deal to combine forces in search and pose a challenge to market leader Google.

Under the agreement, Microsoft's Bing search engine will become the back-end system for Yahoo's search pages while Yahoo will become the worldwide sales force for both companies' premium search advertisers.

"This deal will create a significant competitive alternative in search," said Yahoo CEO Carol Bartz in a conference call Wednesday morning, in a not-so-subtle reference to Google, which commands about two-thirds of the U.S. online search market.

She predicted the relationship would add $500 million a year to Yahoo's operating income, reduce capital expenditures by $200 million and improve annual operating cash flow by approximately $275 million.

"This agreement has been a long time coming," said Microsoft CEO Steve Ballmer in the conference call, adding that the alliance creates "a really strong number two player in search and search advertising." Ballmer said the deal also will "provide great momentum for Bing, which has been well-received in the marketplace since its launch just over a month ago."

The dance between Microsoft and Yahoo began Feb. 1, 2008, when Microsoft offered more than $44 billion to acquire Yahoo outright, a proposal Yahoo bitterly fought and which Microsoft ultimately dropped. But almost immediately the two began discussing an alliance revolving around search, talks that have continued for more than a year.

Under the terms of the 10-year agreement, Microsoft Bing will be the exclusive algorithmic search and paid search platform for all Yahoo sites. Microsoft acquires an exclusive 10-year license to Yahoo's core search technologies and will have the right to integrate those technologies into its Web search platforms.

Yahoo becomes "the exclusive worldwide relationship sales force for both companies' premium search advertisers," according to the agreement. Self-serve advertising by both companies will be fulfilled by Microsoft's AdCenter platform, which will also set prices through its automated auction system. Yahoo will continue to syndicate its existing search affiliate partnerships.

"Advertisers and publishers get a competitive alternative and more opportunities to see their investments go further," Ballmer said.

Microsoft will compensate Yahoo through a revenue-sharing agreement based on traffic generated on Yahoo's online properties and will pay Yahoo traffic acquisition costs at an initial rate of 88 percent of generated search revenue. Each company maintains its own display advertising business and sales force.

The agreement is subject to regulatory approval.