Yahoo, Google Ink Multi-Million Dollar Deal

Under the deal, advertisers will continue to pay Yahoo directly for clicks served by Yahoo from Yahoo's Panama and Content Match marketplaces. Advertisers will pay Google directly for each click on Google paid search results that appear on Yahoo-owned and operated networks or certain affiliate sites. Google will share a percentage of this revenue with Yahoo.

In addition, Yahoo and Google have agreed to enable interoperability between their respective instant messaging services.

Yahoo said in a statement that at current monetization rates, this is worth approximately $800 million in annual revenue. In the first 12 months, Yahoo expects the pact to generate an estimated $250 million to $450 million in incremental operating cash flow.

The agreement applies to paid search and content match but does not apply to algorithmic search. The deal also applies to current partners in Yahoo's publisher network.

The non-exclusive pact has a term of up to 10 years: a four-year initial term and two, three-year renewals at Yahoo's discretion. It applies to only to Yahoo's operations in the U.S. and Canada.

Google stressed that the pact is not a merger. In a statement the company said the agreement does not increase Google's share of search traffic and that Yahoo will continue to run its own search engine and advertising programs, and the agreement will not increase Google's share of search traffic.

Additionally, Google said that the agreement "does not let Google raise prices for advertisers."

"Google does not set the prices manually for ads; rather, advertisers themselves determine prices through an ongoing competitive auction," the company said in a statement. "We have found over years of research that an auction is by far the most efficient way to price search advertising and have no intention of changing that."

Both companies can end the agreement at any time. However, Yahoo would have to pay a termination fee if the agreement is terminated as a result of a change in control that occurs within 24 months. The termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement.

While the companies are not required to have regulatory approval, they have voluntarily agreed to delay implementation for up to three-and-a-half months while the U.S. Department of Justice reviews the arrangement. Google also provides similar services to sites like AOL and Ask.com as well as other partners.

Omid Kordestani, senior vice president, Global Sales and Business Development at Google said that the company believes the agreement is "good for competition."

"The truth is, this kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition," he said in a blog posting. "Toyota sells its hybrid technology to General Motors, even though they are the No. 1 and No. 2 car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market. Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users."

While competition may be good, at least one government official has already expressed concern.

"We will closely examine the joint venture between Google and Yahoo announced today," U.S. Senator Herb Kohl (D-WI), chairman of the Senate Antitrust Subcommittee, said in a statement. "This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."