Microsoft and Yahoo in alliance against Google

Chicago (IL) – Microsoft and Yahoo finally reached an agreement how to collaborate, subject to regulatory approval. It may not be the acquisition the two companies were aiming for initially, but there is now a 10 year agreement that establish a close tie between the search technologies and advertising sales, which are critical to both companies to better compete with Google.  

A deal between Yahoo and Microsoft always seemed to be more a question of when rather than if. This morning, both companies announced that they have finally reached an agreement that meets the expectations of both Microsoft and Yahoo. Following yesterday’s report, the firms said they agreed to a 10 year deal, which will give Microsoft a 10 year license to Yahoo’s core search technologies and will make Yahoo the “exclusive worldwide relationship sales force” for both companies’ premium search advertisers.

As a result, Microsoft’s Bing will become the search platform for Yahoo’s sites. Yahoo said it will continue to use its technology and data in other areas of its business such as display advertising technology. Self-serve advertising for both companies will be covered by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process. Additionally, each company will maintain its own separate display advertising business and sales force.

Microsoft agreed to pay Yahoo through a revenue sharing agreement based on traffic generated on Yahoo’s network of Yahoo-owned as well as affiliate sites. Microsoft will pay traffic acquisition costs to Yahoo at an initial rate of 88% of search revenue during the first five years of the agreement. Yahoo will continue to syndicate its existing search affiliate partnerships.
Microsoft said it will guarantee Yahoo’s revenue per search (RPS) in each country for the first 18 months. When all technological and sales ties are established, which both companies expect to be completed after two years following regulatory approval, the agreement is estimated to provide Yahoo with an annual operating income of $500 million and savings of approximately $200 million. These estimates value the deal between the two companies somewhere between $5.6 and $7 billion.
“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 in a prepared statement. “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.”
For Microsoft, the deal adds substantial market share to become a much more attractive destination for search advertisers, while cutting out the cost of the acquisition of Yahoo. According to Comscore, Google held a market share of 65.0% in June of this year, while Microsoft held 8.4%. With Yahoo on board, the share climbs by 19.6% to 28.0% of the market.