Microsoft and Yahoo stop talking, and Google wins

Today Microsoft and Yahoo officially stopped talking -- the day, I'm sure, Yahoo investors were dreading. The hope that Microsoft and Yahoo might still work out a deal fizzled, and as result, Yahoo shares plummeted 10% before trading ended today.

today announced that discussions with Microsoft regarding a potential transaction -- whether for an acquisition of all of Yahoo! or a partial acquisition -- have concluded. The conclusion of discussions follows numerous meetings and conversations with Microsoft regarding a number of transaction alternatives, including a meeting between Yahoo! and Microsoft on June 8th in which Chairman Roy Bostock and other independent Board members from Yahoo! participated. At that meeting, Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested.

It worked out well for Google though -- no Microsoft/Yahoo merger on the horizon, and a fresh partnership that lets them put ads directly onto Yahoo properties. Jackpot! They are careful to point out why this deal is good, and not evil on their blog:

• This is not a merger. Rather, we are merely providing access to our advertising technology to Yahoo! through our AdSense program.
• This does not remove a competitor from the playing field. Yahoo! will remain in the business of search and content advertising, which gives the company a continued incentive to keep improving and innovating. Even during this agreement, Yahoo! can use our technology as much or as little as it chooses.
• This does not prevent Yahoo! from making similar arrangements with others. This arrangement is not exclusive, meaning that Yahoo! could enter into similar arrangements with other companies.
• This does not increase Google's share of search traffic. Yahoo! will continue to run its own search engine and advertising programs, and the agreement will not increase Google's share of search traffic.
• This does not let Google raise prices for advertisers. Google does not set the prices manually for ads; rather, advertisers themselves determine prices through an ongoing competitive auction. We have found over years of research that an auction is by far the most efficient way to price search advertising and have no intention of changing that.

Here are some excerpts from the announcements made by Google and Yahoo:

"[Google] has reached an agreement that gives Yahoo! the ability to use Google's search and contextual advertising technology through its AdSense(TM) for Search and AdSense for Content advertising programs. Under the agreement, Yahoo! has the option to display Google ads alongside its own natural search results in the U.S. and Canada. In addition, Yahoo! can serve contextually targeted ads on its U.S. and Canadian web properties as well as on its current publisher partner sites." -- Google

"Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!'s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." -- Yahoo