Microsoft and Yahoo strike a 10-year search and advertising deal that has Microsoft Bing search engine powering Yahoo's search. Yahoo will power the search ad sales teams for both companies as Microhoo seeks to challenge search engine giant Google.
Microsoft and Yahoo officially inked on July 29 the search ad
deal everyone's been talking about: Microsoft agreed to power Yahoo's search engine,
and Yahoo agreed to become the exclusive worldwide relationship sales force for
both companies' search advertisers.
Microsoft will pay
Yahoo will pay traffic acquisition costs (TACs) to Yahoo at an initial rate of
88 percent of search revenue generated on Yahoo's O&O sites during the
first five years of the agreement.
The deal, coming 18 months after Microsoft failed to buy Yahoo for $44.6 billion, has a duration of 10 years,
during which the Microhoo combination will be working feverishly to chip away
at search engine giant Google's 65 percent market share.
Microsoft and Yahoo hold 8.4 percent and 19.6 percent of the market,
respectively; together, they believe closing the gap will make them a worthy
adversary of Google. Yahoo and Microsoft said in a statement:
"Providing a viable alternative to advertisers, this deal will combine
Yahoo and Microsoft search marketplaces so that advertisers no longer have to
rely on one company that dominates more than 70 percent of all search. With the
addition of Yahoo's search volume, Microsoft will achieve the size and scale
required to unleash competition and innovation in the market, for consumers as
well as advertisers."
Microsoft CEO Steve
Ballmer said the agreement will give Bing the scale it needs to more
effectively compete, "attracting more users and advertisers, which in turn
will lead to more relevant ads and search results."
Yahoo CEO Carol Bartz said in a statement
that the deal will enable Yahoo to improve its display advertising and
mobile areas, while providing advertisers greater scale and efficiencies
working with a single platform.
Ballmer and Bartz are hosting a conference call at 8:30 a.m. EDT July 29 to
discuss the deal.
The terms of the deal are as follows:
Microsoft will acquire an
exclusive 10-year license to Yahoo's core search technologies, and will be
able to integrate Yahoo search technologies into its existing Web search
platforms.
Microsoft's Bing will be the
exclusive algorithmic search service and search ad platform for Yahoo
sites, with Yahoo continuing to use its technology and data in other areas
of its business, such as enhancing display advertising technology.
Each company will maintain
its own separate display advertising business and sales force; Yahoo will
"own" the user experience on Yahoo properties, including the
user experience for search, even though it will be powered by Microsoft
technology.
Microsoft will compensate
Yahoo through a revenue-sharing agreement on traffic generated on Yahoo's
network of both owned and operated (O&O) and affiliate sites-Microsoft
will pay traffic acquisition costs (TACs) to Yahoo at an initial rate of
88 percent of search revenue generated on Yahoo's O&O sites during the
first five years of the agreement, and Yahoo will continue to syndicate
its existing search affiliate partnerships.
Microsoft will guarantee
Yahoo's O&O revenue per search (RPS) in each country for the first 18
months following initial implementation in that country.
At full implementation,
expected to occur within 24 months following regulatory approval, Yahoo
estimates, based on current levels of revenue and current operating
expenses, that this agreement will provide a benefit to annual GAAP
operating income of approximately $500 million and capital expenditure
savings of approximately $200 million. Yahoo also estimates that this
agreement will provide a benefit to annual operating cash flow of
approximately $275 million.
To preserve consumer privacy,
the deal limits 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.
These actions will receive
severe scrutiny by privacy watchdogs Consumer Watchdogs and the Center for
Digital Democracy; these groups will press the Justice Department and
Federal Trade Commission to regulate the Microhoo arrangement.
Yahoo will become the
exclusive worldwide relationship sales force for both companies' premium
search advertisers. Self-serve advertising for both companies will be
fulfilled by Microsoft's AdCenter platform, and prices for all search ads
will continue to be set by AdCenter's automated auction process.
Yahoo and Microsoft will continue competing in Webmail, instant messaging,
display advertising and other aspects of the companies' businesses.
The transaction is subject to regulatory review, but the companies hope to
close the deal in early 2010.
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