Microsoft-Yahoo Deal Official: Soon Only Two Players in Search

Yahoo and Microsoft have consummated a deal that will make Bing the default provider of algorithmic and paid search services on Yahoo sites for the next 10 years. The deal combines the No. 2 and No. 3 players in search to create a contender with approximately 30 percent of the search market, to Google’s approximately 65 percent.

That’s a degree of competition Google hasn’t faced since Yahoo last held 30 percent of the market in approximately early 2006.

Under the deal, self-serve advertising for search campaigns on both Web sites will be handled by Microsoft’s AdCenter platform, as Yahoo licenses both its search technology and its Panama ad buying system to Microsoft for the life of the deal. However Yahoo will retain control of search advertising sales for premium, human-sold campaigns on both Microsoft and Yahoo-owned Web sites.

Display advertising sales at the companies will remain entirely separate. The companies said they will continue to compete vigorously on e-mail, video, display ads, IM, and other areas.

“This deal enables us to keep a healthy revenue stream and invest in areas that more critical to our future, while Microsoft invests in search technology,” said Yahoo CEO Carol Bartz in a video published this morning. “For advertisers the deal will offer a viable, competitive alternative in the marketplace.”

Under the deal’s terms, Microsoft will pay Yahoo 88 percent of search revenue generated through Yahoo’s owned and operated properties for the first five years of the relationship. For the first 18 months of the pairing, it will guarantee Yahoo’s revenue per search in each country where it operates, following implementation in that country.

Yahoo estimates the deal will generate annual operating income of $500 million and capital expenditure savings of $200 million.

Yahoo’s search technology will be licensed to Microsoft, and the latter company will have the right to integrate that technology into its own products.

The next step for Microsoft and Yahoo is to gain regulatory approval for their partnership. To soothe concerns of privacy groups and legislators, Yahoo and Microsoft emphasized any user data shared between them would be restricted to that necessary to optimize the search platform. That raised a question about whether Yahoo will continue to use search data to support its behavioral targeting efforts, as has long been its practice.

“The agreement maintains the industry-leading privacy practices that each company follows today,” they said.