Google, Yahoo Strike Search Advertising Deal

Google and Yahoo June 12 confirmed a nonexclusive deal to run Google’s search and contextual advertising technology through its AdSense for Search and AdSense for Content advertising programs on the Yahoo search engine.
Financial terms of the deal, which has been rumored since the companies began testing it in April to throw a wrench into Microsoft’s bid to buy Yahoo, were not disclosed.
The agreement, coming just hours after Yahoo proclaimed dead its negotiations with Microsoft to sell its search business or do some other deal, includes a four-year initial term and two three-year renewals if Yahoo chooses.
Google CEO Eric Schmidt said on a conference call the deal reflects a new trend in the Internet industry, where competitive companies find the areas where they are the best and occasionally do business with each other while competing and innovating at the same time.
“By doing this [deal] with Yahoo, we’re … helping Yahoo increase the value of its existing assets, investing in its advertisers, publishing partners and its many, many users,” Schmidt said.
In the deal, Yahoo can display as many or as few Google ads alongside its own natural search results in the United States and Canada as it chooses. Yahoo will be able to complement its own advertising program with Google’s advertising technology.
Yahoo may also serve contextually targeted ads on its U.S. and Canadian Web sites, as well as on its current publisher partner sites. Yahoo can make similar deals with other search providers if it chooses and the company will maintain relationships with its own advertising customers.
Yahoo will continue to operate its own search engine, Web properties and advertising services, which is what the company has been striving for ever since Microsoft on Feb. 1 made an unsolicited bid to buy the company for $44.6 billion.
Microsoft backed off in May, though the companies resumed talks in which Yahoo might sell its search business to Microsoft
Google moved in quickly to negotiate an alternative to bail Yahoo out, and after Yahoo proclaimed talks with Microsoft dead June 12, the companies quickly moved to sew up this deal.
The deal is a dicey proposition because, although Google provides similar services to rivals AOL and Ask.com, Google and Yahoo are the two top search providers, constituting more than 80 percent of the market. It is sure to undergo regulatory scrutiny, particularly at the behest of Microsoft and other lobbyists.
To that end, Google and Yahoo are delaying the implementation of the deal for up to three-and-a-half months to give the U.S. Department of Justice time to review it.
As a throw-in deal, Google and Yahoo agreed to enable their Google Talk and Yahoo Instant Messenger applications to work together. So, a Google Talk user will be able to send an instant message to a Yahoo Instant Messenger user.
Omid Kordestani, senior vice president of global sales and business development at Google, wrote in a blog post June 12 that the agreement will put more relevant ads before users as they search the Web, with advertisers and publishers boosting their revenue. Of this, there is little doubt.
Some experts believe Google makes 60 to 70 percent more revenue than Yahoo’s search ad system, and Citi Investment Research’s Mark Mahaney claimed that Yahoo could make upward of $1 billion annually from such an arrangement.
Moreover, Kordestani argued that the deal is good for competition despite the opposite claims from Microsoft and lobbyists.
“This kind of arrangement is commonplace in many industries, and it doesn’t foreclose robust competition,” he wrote. “Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally.”