Microsoft and Yahoo have announced that they agreed to collaborate on internet search and online advertising.
Under the agreement, Microsoft will get a 10-year licence for Yahoo's "core search technologies", the companies said yesterday in a statement. Microsoft's Bing will become the algorithmic search and paid search platform for Yahoo sites.
Reports cited by AdAge, the advertising portal that broke the news about discussions taking place between Yahoo and Microsoft, suggested there were no upfront payments between the two companies; however a dynamic revenue-share model had been agreed.
In the first two years of the deal, Yahoo will retain all search revenues, plus another 10 per cent, dropping to 90 per cent of revenues in year three. A combined Yahoo and Microsoft search offering will create a much stronger challenger to the dominant Google brand. According to comScore, Microsoft and Yahoo have eight per cent and 20 per cent of US search share respectively, behind Google's 65 per cent.
Google is even more dominant in the rest of the world, with a global share of 67 per cent compared to a combined 11 per cent for Microsoft and Yahoo.
"Microsoft and Yahoo know there's so much more that search could be," said Microsoft Chief Executive Steve Ballmer, reported by MercuryNews.com. "This agreement gives us the scale and resources to create the future of search."
Microsoft and Yahoo are bracing for antitrust scrutiny into whether the combination would have an adverse effect on competition in the online ad market.
"We think this is one of these cases where the coming together will produce more effective market competition, not less," Ballmer told analysts.
Google, which also retains a number one position in the a few countries in the region including the UAE, as reported by the recent YouGov BrandIndex, said: "There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. Obviously we haven't had a chance to review the deal yet, but we're interested to learn more and are sure that the regulatory authorities will review it closely."
The deal follows the collapse of an $800m (Dh2.9 billion)) paid-search deal with Google last November, due to pressures from parties including anti-trust investigators and Microsoft according to NewMediaAge, advertising news portal.
Yahoo had also received a $47.5bn takeover bid from Microsoft 18 months ago.
Microsoft, the world's largest software maker, is seeking more users for its Bing internet search engine. Under the deal, Microsoft's Bing becomes the default search engine on Yahoo, but Yahoo retains the ability to sell search.
Microsoft released its new search engine, Bing, in June to jump-start its search business. Bing's features, such as grouping together product reviews and showing predictions for airfares, helped boost Microsoft's market share last month, at Yahoo's expense, not Google's.
Yahoo CEO Carol Bartz was believed to have met his Microsoft counterpart Steve Ballmer to discuss a possible search deal soon after joining the company at the beginning of the year.
Bartz took the job at Yahoo in January, replacing co-founder Jerry Yang, who had rankled investors by rejecting Microsoft's buyout offer. In lieu of a Microsoft deal, Yang pursued a failed ad partnership with Mountain View, California-based Google.
That deal fell apart in November after the US government threatened to challenge the agreement.
To bolster product development, Microsoft has gone after Yahoo's search engineers. In December, the company lured former Yahoo engineering vice president Qi Lu to lead its online division. Two weeks earlier, Sean Suchter left Yahoo to head Microsoft's Silicon Valley Search Technology Center. Larry Heck, who oversaw a Yahoo lab that developed search and ad algorithms, joined Microsoft in February.
While Google has maintained its lead, all three companies face a slowdown in online advertising as marketers pare budgets during the recession. The Internet-ad market may increase 10 per cent this year, after expanding 22 per cent in 2008, according to ZenithOptimedia Group in London.
Last week both Yahoo and Microsoft posted online ad revenue declines of 14 per cent and 16 per cent respectively through the second quarter days after Google revealed its ad revenues were up by three per cent over the same period. (With inputs from wires and websites)
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