It's official: Microsoft-Yahoo ink 10-year search pact; Regulator scrum begins

Updated: Microsoft and Yahoo made it official on Wednesday. The two companies announced a 10-year pact where Microsoft will power Yahoo search. Yahoo also becomes the sales force for Microsoft's premium properties.

The companies said the search deal will accelerate innovation and bring more value to advertisers and Web users. Yahoo and Microsoft also get to focus on their core strengths. Yahoo CEO Carol Bartz says there will be "boatloads of value for our users and industry." Microsoft CEO Steve Ballmer says the Yahoo deal gives Bing the scale to compete.

In a blog post, Bartz said:

You’ll still find search boxes all across Yahoo!, but this deal will make the difference between a great Yahoo search experience and an awesome one.

On a conference call, Bartz said that the pact allows both companies to combine forces to take on Google in search. Google has 70 percent of the search market and Microsoft will now have the rest.

Bartz added that "this deal won't happen overnight. We anticipate closing the deal by early 2010." She added that once the deal closes Yahoo will transition to Bing search in major markets three to six months after the deal closes. Migration from Yahoo's Panama ad system to Microsoft's AdCenter platform will happen in 12 months after close, she said.

Ballmer said that the additional search scale will make the ad market more liquid and close a revenue per click gap with Google.

The wild-card: Will regulators go for it?

Rest assured Google will raise a regulator ruckus. "We suspect we'll see some opposition from the competitor," said Ballmer. The companies said:

Microsoft and Yahoo expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions. The companies are hopeful that closing can occur in early 2010.

That may prove to be an understatement.

Also see: Gallery: Ballmer-Bartz ink Microhoo deal

• Microsoft-Yahoo: Gauging the IT integration risks

Among the key details (statement, joint Web site):

• The deal is for 10 years.
• Microsoft will license Yahoo's core search technologies for 10 years;
• Bing is the "exclusive algorithmic search and paid search platform for Yahoo sites'.
• Yahoo is the worldwide sales force for both companies. Self-serve and search advertising will be built on Microsoft's AdCenter platform.
• Yahoo will own the user experience on its properties.
• Microsoft will pay traffic acquisition costs to Yahoo at a rate of 88 percent of search revenue on Yahoo sites for the first five years. Yahoo will continue its search affiliate partnerships. On a conference call, Ballmer said: "We paid a high TAC rate. There's no question. He added that the upside comes as Microsoft improves relevance due to more scale. "Our upside comes as execution really builds," he said.
• "Some Yahoo engineers may move to Microsoft," said Ballmer.
• Microsoft guarantees Yahoo's owned and operated revenue per search in each country for 18 months;
• After 5 years, Microsoft can retake premium ad sales back from Yahoo.
• The implementation will occur within 2 years after regulatory approval.

Add it up and Yahoo expects an annual GAAP operating income boost of $500 million with capital expense savings of $200 million. Yahoo expects the Microsoft pact to boost annual operating cash flow by $275 million.

There are other notable moving parts. For instance, Yahoo was quick to say that the agreement doesn't cover every Web property they own. Email, instant messaging and display advertising are not included. Microsoft and Yahoo also say that they won't swap customer data except for the "minimum necessary."

Also see: With Microsoft search deal Yahoo risks becoming AOL