Microsoft-Yahoo Search/Ad Pact: Alternative to Google

Microsoft and Yahoo have finally forged an alliance after months/years of on and off negotiations. Microsoft will power Yahoo's search tool while Yahoo! will become the exclusive sales force for both firms premium search advertisers.

The terms of the deal are for 10 years. Microsoft will be licensing Yahoo's core search technologies, and Microsoft's Bing will become the exclusive algorithmic search and paid search platform for Yahoo sites. Each company will maintain its own separate display advertising business and sales force.

Microsoft will pay traffic acquisition costs at an initial rate of 88% of search revenue generated on Yahoo sites for the first five years. Yahoo sees the deal lifting annual operating income by around $500 million and capital expenditure savings of $200 million. Yahoo sees an annual operating cash flow benefit of $275 million.

"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," said Yahoo! CEO Carol Bartz. "Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities, and mobile experiences."

This alliance presents a more significant threat to Google by offering a legitimate, viable alternative to advertisers by combining Yahoo! and Microsoft search marketplaces so that, according to the release "advertisers no longer have to rely on one company that dominates more than 70 percent of all search."

Microsoft CEO Steve Ballmer said the agreement will provide Microsoft's Bing with the scale necessary to "more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results."

"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," said Ballmer. "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."