Microsoft confirms Yahoo deal, Bing to power Yahoo! search

Yahoo! and Microsoft have both confirmed earlier reports of a deal over search.

In a joint statement Yahoo CEO Carol Bartz confirmed "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." Microsoft CEO Steve Ballmer said the agreement will provide Microsoft's search engine, Bing, the scale necessary to more "effectively compete" and attract more advertisers and users.

The key terms of the agreement are as follows:

• The term of the agreement is 10 years;
• Microsoft will acquire an exclusive 10 year license to Yahoo!'s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms;
• Microsoft's Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.
• Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft's AdCenter platform, and prices for all search ads will continue to be set by AdCenter's automated auction process.
• Each company will maintain its own separate display advertising business and sales force.
• Yahoo! will innovate and "own" the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology.
• Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!'s network of both owned and operated (O&O) and affiliate sites.
• Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!'s O&O sites during the first 5 years of the agreement.
• Yahoo! will continue to syndicate its existing search affiliate partnerships.
• Microsoft will guarantee Yahoo!'s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country.
• At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.
• The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

What happens to Yahoo! search now?

Microsoft has confirmed that the deal with not close until 2010. Consumers will not see a change until 3 to 6 months after that. For now Yahoo! search will be the same until the deal is approved and complete and then Yahoo! search results will be provided and branded with Bing, "powered by Bing" will appear.

Stocks and shares

Microsoft shares rose sharply yesterday afternoon when reports surfaced that Microsoft and Yahoo were about to announce the deal. The NASDAQ exchange has not yet opened at time of writing so it will be interesting to see how both companies share prices fair in the markets.

Image credit: Yahoo Finance

History of deal

The agreement ends Microsoft's talks with Yahoo, which have lasted nearly 2 years. During the talks Microsoft has evaluated a takeover bid, seen Yahoo reply to it's ultimatums and nearly miss out on a deal when Yahoo attempted to partner with Google. The Yahoo-Google partnership failed due to regulatory concerns.

Bing will now have nearly 30% market share of search in US
According to figures from ComScore, in June Google held 65% of the search market in the US, with Yahoo at 19.6% and Microsoft on only 8.4%. With this deal Microsoft's Bing market share will be up to nearly 30% market share in the US, tripling its current share. Although Bing's market share will increase, Microsoft will not be earning as much as 30% revenue market share due to Yahoo keeping their own advertising model.

Steve Ballmer, Microsoft CEO, on announcement: