Microsoft and Yahoo have agreed to merge their search technology and advertising operations, with Microsoft's Bing engine powering Yahoo's search and Yahoo handling worldwide search advertising for both companies.
"Providing a viable alternative to advertisers, this deal will combine Yahoo and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 percent of all search," the companies said in a joint release on Wednesday. (Google currently has about 70 percent share of the search market, according to web-analytics firm Compete.)
The 10-year deal gives Microsoft an exclusive licence to Yahoo's search-engine technologies, which it will be able to incorporate into its own search platforms. The plan is for Microsoft's Bing to become the search engine for Yahoo's sites.
The companies said Yahoo will "own the user experience" on its sites, which include its finance news, games, sports and OMG gossip sites.
Microsoft will pay Yahoo 88 percent of search revenue from traffic on Yahoo's own sites, with revenue guarantees worldwide for 18 months.
"This agreement gives us the scale and resources to create the future of search," Microsoft chief executive Steve Ballmer said in a statement. "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo will provide the scale we need to deliver even more rapid advances in relevancy and usefulness."
Yahoo and Microsoft's combined share of the search market today is around 30 percent. In a conference call, Ballmer said the combined share would help Microsoft develop better search algorithms for Bing.
"There's a feedback loop in the search business — the more paid ad searches you serve, the more you learn about what people are clicking on," Ballmer said. "Scale drives knowledge, which drives innovation and relevance."
Yahoo chief executive Carol Bartz, who took over from Jerry Yang in January following failed negotiations for a full-scale takeover of the company by Microsoft, said in the statement that the move will help Yahoo focus on other areas. She also said the move has the full support of the company's board.
The companies said they expect the deal to complete in 2010, depending on regulatory approval, with full implementation following 24 months later. During this two-year period, Bartz said in the conference call that "there will be some redundancies in Yahoo". She also indicated that "many Yahoo search employees will be asked to take jobs at Microsoft" during this integration period.
According to Ballmer, the companies plan to address regulators' potential antitrust fears by arguing that the deal makes the market more competitive."Us coming together will provide more effective competition to the market leader [Google]," Ballmer said in the call, adding that this situation would be "good for consumers, advertisers and publishers".
Bartz said in the conference call that Yahoo will use Microsoft's mobile search technology as part of the deal, although Yahoo will not be as exclusively tied to Microsoft's technology in this domain as it will be on the desktop.
Yahoo estimates the deal will save $200m (£120m) a year on capital expenditure and increase its annual cash flow by around $275m a year, with a $500m benefit to annual income overall. Microsoft has not commented on its financial expectations of the deal.