Microsoft and Yahoo confirm search deal

The rumours are finally true – Microsoft and Yahoo are to partner on search.

The newly-weds claimed the deal will boost the “pace and breadth of innovation” in the search market, while advertisers will no longer have to rely on one company that dominates more than 70 per cent of all search – a dig at leading competitor Google.

Under the deal, Microsoft will run the search side while Yahoo will handle sales for both firms. Microsoft’s chief executive Steve Ballmer said that the deal will give his own firm’s new search engine Bing the scale to compete with Google.

The 10-year agreement will give Microsoft exclusive licence to Yahoo’s search tech, letting the Redmond firm use it in its own search tools. Microsoft’s Bing will be the main search tool, but Yahoo will still “own” its sites.

Yahoo will run the search advertising side, but Microsoft’s own AdCentre platform will continue to set pricing, and each firm will keep its own advertising and sales staff.

Microsoft will share revenue with Yahoo based on traffic from the web firm’s network. For the first five years, Microsoft will pay 88 per cent of the search revenue from Yahoo sites back, with the first 18 months guaranteed at a set rate. That rate may be tweaked after the first five years, the firms said.

The agreement will see Yahoo gain $500 million in operating income and save $200 million in capital spending, as well as boosting cash flow by about $275 million a year.

Bartz said Yahoo refused previous deals because Microsoft was offering a big up front, one off payment and a lower share of revenue, which was not what her firm wanted.

Boatloads of value?

Yahoo's chief executive Carol Bartz said the deal offered “boatloads” of value to her firm, echoing a previous statement saying such a tie-up would require “boatloads” of cash before she agreed.

“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,” she said in a statement.

The deal doesn’t involve each firm’s own web properties, email, instant messaging or display advertising – where the two promise to continue to compete.

Regulatory concerns

The pairing expects to have to explain itself to regulators - and believes Google will object. Ballmer said on a conference call "the competitor" may not want competition, and added he "certainly would expect the competitor to be aggressive" in its opposition.

In a statement, a Google spokesperson said: "There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We're interested to learn more about the deal."

Ballmer added that he believes the two firms have a good case to win regulatory approval, as the deal will increase competition in the market.

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