Finally: Microsoft and Yahoo take on Google

It’s about time I’d say, considering they’ve been in talks for such a long period. Rumors were rife that a Google-Yahoo merger was in the cards quite some time ago that Microsoft strongly opposed. This was around the same time that Microsoft expressed an interest in Yahoo in a bid to outgrow Google. That initiative is what has probably culminated in this merger. Their combined market share of about 28% is still nowhere close to Google’s 65%.

If you don’t want to read through the entire Reuter’s article, simply put: Bing (try Bing without it’s background) will replace Yahoo’s search and Microsoft’s Adcenter will be used to show ads on the search pages. Microsoft stands to gain from the increased exposure, Yahoo stands to gain from the 88% revenue sharing deal that favours Yahoo. The deal is expected to come through by early 2010.

All eyes are now on Bing, as for me, I’ve replaced the default search engine on Firefox from Google to Bing – it’s a search engine that’s worth giving a chance.

Update: WSJ has done a better job of summing up the terms of the agreement here. Excerpts:

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 percent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement; and

– 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; and

– 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.

The agreement does not cover each company’s Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies’ businesses. In those areas, the companies will continue to compete vigorously.