Microsoft and Yahoo agree search deal

Microsoft and Yahoo agreed on Wednesday an online alliance that could create a more formidable rival to Google in the search business.

In a joint statement, the companies confirmed the widely expected deal, which will give Microsoft a 10-year licence to integrate Yahoo’s search technology into its existing search platforms, while Yahoo will become the “relationship sales force” for advertisers for both companies.

”This agreement comes with boatloads of value for Yahoo, our users, and the industry, and I believe it establishes the foundation for a new era of internet innovation and development,” said Carol Bartz, Yahoo’s chief executive.

”Users will continue to experience search as a vital part of their Yahoo experiences and will enjoy increased innovation thanks to the scale and resources this deal provides.”

The agreement marks an end to Microsoft’s 18-month pursuit of Yahoo, which began with an unsolicited full takeover bid that rocked the internet world. Since last summer, the software giant has been pushing for a looser alliance that would combine the search technology and search advertising systems of the two companies and give them a better chance to catch up with Google.

”There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users,” a Google spokesperson said on Wednesday. ”We’re interested to learn more about the deal.”

Yahoo estimates that the agreement will provide it with $500m in annual operating income and $200m of capital expenditure savings. Yahoo will be compensated by Microsoft through a revenue sharing agreement based on traffic generated on its network of websites.

Both companies will maintain their own display advertising businesses and sales forces.

”Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company,” said Steve Ballmer, Microsoft’s chief executive. ”This agreement with Yahoo will provide the scale we need to deliver even more rapid advances in relevancy and usefulness.”

The talks picked up steam late last week after the two sides reached the outlines of a deal in which Yahoo would not receive any upfront payment, as Microsoft had initially offered in the middle of last year, but the two sides would divide future search advertising revenues.

For Yahoo, the partnership is intended to bring an influx of cash at a time of declining revenue in its search business. Ms Bartz, brought in as chief executive from outside the company after the debacle of last year’s public break-up of the Microsoft talks, has continued to pare staff since taking over in January.

Ms Bartz is shedding non-essential Yahoo units, but she decided months ago that the company needed to maintain a credible share of the search market, currently about 20 per cent. She feels that data from search are key to targeting display ads based on user preferences, and display will continue to play a major role in Yahoo’s future.

After Microsoft relaunched and rebranded its own search engine, Bing, one leading Yahoo investor said the fact that it was technologically a big improvement eased Yahoo’s concern that it would be teaming up with an inferior product that would turn users off.

”I think they’ve done a good job,” Ms Bartz said last week. In the most recent quarter, Yahoo search revenue fell 15 per cent from a year earlier.

But both Yahoo and Microsoft have failed to dent Google’s massive lead in the global search market in recent years.

According to Comscore, the online measurement group, Google increased its share of global web searches from 60 per cent last August to 69 per cent in May 2009, while Yahoo’s share fell from 11 per cent to 9 per cent in the same period.

Microsoft, which launched Bing in June, has remained stable at around 3 per cent this year, lagging China’s Baidu with 9 per cent share of queries in May.

Even a combination of Microsoft and Yahoo’s search businesses fails to overtake Google. According to Nielsen, the audience research group, Bing had 41m unique users in the US in June, compared with Yahoo’s 67m and Google’s 136m.

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