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Microsoft Pri0

Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day.

July 29, 2009 at 5:27 AM

Microsoft and Yahoo make a deal

Microsoft and Yahoo announced an online-search partnership this morning with the hope that their combined forces will help them catch up to Google.

Microsoft’s Bing will become the search engine for both companies, while Yahoo will take over selling much of the online search advertising.

While it’s not the merger Microsoft had hoped for when it first offered to buy Yahoo 18 months ago, the two companies say it will increase innovation in search.

Here are the terms of the complex 10-year agreement.

Microsoft will pay Yahoo both license fees and guarantee revenue from the partnership.

Search engine: Microsoft will license Yahoo’s search technology. Microsoft’s search engine Bing will become the default search engine on Yahoo.

Selling online advertising: Yahoo’s sales force will sell advertising to premium search advertising customers. Self-serve advertising customers for both Yahoo and Microsoft will use Microsoft’s AdCenter sales-technology platform. Both companies will continue to sell their own online display advertising, such as banner advertising.

Revenue sharing: The two companies will share revenue from the traffic on Bing. For the first five years, Microsoft will pay 88 percent of search revenue generated from Yahoo’s sites to Yahoo. Microsoft will also guarantee a certain level of search revenue for the first 18 months of combined service in a particular country. Yahoo expects to earn $500 million in operating income from the agreement and save $200 million in capital costs.

Microsoft Chief Executive Steve Ballmer said in a statement,

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,

Success in search requires both innovation and scale. With our new Bing search platform, we’ve created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness.

Microsoft and Yahoo! know there’s so much more that search could be. This agreement gives us the scale and resources to create the future of search.”

Carol Bartz, chief executive of Yahoo, had this to say in the joint statement:

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.

Combined, the companies would have a reach of almost 30 percent of the search market. Google has 65 percent of search traffic now, according to the latest report from research firm comScore.

If approved by regulators, the companies hope to close the agreement in 2010. The companies launched a joint site announcing the deal at www.choicevalueinnovation.com

Here is video of Ballmer and Bartz talking about the deal:

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Update 10:46 a.m.: The market reaction has been negative on Yahoo and neutral on Microsoft stock so far. Yahoo shares opened at $16 after closing yesterday at $17.22 During the day, shares dropped by as much as 11 percent to $15.35.

Microsoft shares opened at $23.73 after closing yesterday at $23.47, and has stayed around the opening price, give or take a few cents in today’s trading.

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