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Microsoft and Yahoo to partner for search and ad sales

In a move to better compete with search leader Google, Microsoft and Yahoo have finally come to an agreement to work together by inking a multi-year deal to partner around search and advertising.

According to the terms of the agreement, Microsoft will power Yahoo search, while Yahoo will focus on running both companies’ relationship premium ad sales. This comes on the heels of Microsoft’s launch of search engine Bing, which the online giant released in June, and on the heels of Yahoo’s drop in search revenue and its announcement to restructure its ad sales and user experience.

“The agreement will provide a great momentum for Bing,” said Steve Ballmer, CEO of Microsoft, in a conference call. In the same call, Carol Bartz, CEO of Yahoo, said this new partnership would enable the two to scale their search businesses and create a true alternative to Google. “We face a formidable competitor in one aspect, and that aspect is search. It became obvious to us that working with another great technology company would help us share the investment expense to scale to the market,” she said.

This partnership will give Microsoft and Yahoo a stronger command of the search advertising market against the dominant Google. While Google still remains in command, raking in 77% of search ad spend according to SearchIgnite’s Q2 study, the two remaining search companies together represent the additional 23% of the search market spend.

“The deal is about realizing a more efficient marketplace through an expanded and more competitive search and advertising marketplace, providing consumers and advertisers with greater transparency and choice and creating really a strong number two player in search advertising,” added Ballmer.

For advertisers, this changes the playing field. “Most of the time it was ‘why do we even need to buy on Microsoft because it is only a fragment of the market,’ but they need to be there now, as with this partnership they will become a direct competitor to Google,” said Dan Brough, SVP, search director at DraftFCB. “Gone are the days of saying ‘let’s just buy on Google to give us the most bang for our buck.’ ”

By focusing on their strengths, Yahoo and Microsoft will up the ante for the standards through out the serach marketplace. “For the search marketer and advertiser, coupling Microsoft technology with Yahoo’s traffic and salesforce will be a welcome move,” said Sara Holoubek, president of SEMPO, via e-mail. “For the industry as a whole, it is a reminder that innovation can come through partnership, and that we can expect more strange bedfellows in the future.”

The partnership could potentially lead to a rise in search budgets. “Search has been dominating the online piece of what our clients are doing, and there is a growing share of budget in this arena,” said Rob Garner, search strategy director at iCrossing. “If the ROI proves to be there with this new partnership, then there will be a continuing shift of budgets into search.” Garner also said that search marketers would likely let their money follow the successful search engines. “The bottom line as search marketers is managing for ROI,” he added. “We will move it from any engine to another as long as it has makes sense for our customer.”

According to the deal, 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. The Yahoo search page will remain branded with the Yahoo brand, but will be powered by Bing on the back end.

Brough expects the integration process to be long and complex. “It raises a lot of questions about how the technologies will be integrated and how they optimize after the integration,” he said. “Time will tell how it will play out.”

While Yahoo will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers, the self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform. In addition, Yahoo will continue to use its technology and data in other areas of its business including display advertising and each company will maintain its own separate display advertising business and sales force.
And Yahoo will continue to syndicate its existing search affiliate partnerships.

The agreement does not cover each company’s Web properties and products such as e-mail, instant messaging and display advertising.

The transaction will be subject to regulatory review, but the two companies hope to close the deal by early 2010.

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