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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.