Updated: ‘Microhoo’ Realized; Giants Strike Search Deal

Microsoft and Yahoo—the Ross and Rachel of the Web world—have finally announced a long-awaited search partnership. As part of the new 10-year deal Microsoft’s recently launched Bing product will power Yahoo’s search, and Yahoo’s sales force will sell search ad inventory for both companies globally.

The joint announcement, issued early Wednesday (July 29) ends a year-and-a-half dance between the two companies, which began in early 2008 when Microsoft attempted an outright purchase of Yahoo.

Instead, both companies will continue to be managed separately, maintaining distinct display ad sales teams (despite some speculation to the contrary). In the end, the partnership is all about establishing a stronger No. 2 competitor to Google, which has in recent months seen its share of the search market in the U.S. exceed 65 percent. Together, Yahoo and Microsoft should account for roughly 30 percent of searches.

“What this deal is really about for everyone is scale,” said Yahoo CEO Carol Bartz. during a conference call with reporters and analysts on Tuesday morning.

That scale could provide a huge boon to Microsoft’s Bing (its previous search product had long languished below 10 percent market share)—as well as adCenter, the Microsoft online ad platform, which both companies will now employ for search. However, as part of the deal—in what must have been a major concession for Microsoft—Yahoo will maintain its own brand on its owned-and-operated search pages; Bing will be listed on those pages as having “powered” Yahoo’s search results.

According to Hilary Schneider executive vp, Yahoo North America, even though Yahoo was essentially giving up the search race, in negotiating this arrangement it was crucial that the Yahoo search product still look and feel like Yahoo search to consumers. “The experience will be a Yahoo experience,” she told Mediaweek. “We plan to continue to innovate in search. It will be clear [to users] what the Yahoo experience means.”

Thus, despite an ongoing marketing effort rumored to be in the neighborhood of $100 million to promote Bing to the general public, Microsoft is ok with the new brand taking a back seat in the Yahoo deal. “I think it is really a great compromise,” said Yusuf Mehdi, senior vp, online audience business group at Microsoft, who conceded that Yahoo search “is not actually the Bing experience.”

But beyond branding, Microsoft CEO Steve Ballmer sees the companies’ combined search scale yielding an even greater benefit: larger search volume—which should improve the quality of Bing’s results. “The upside for us really comes as we’re able to improve the relevance of our search product,” he said. “[Better] ads are part of being relevant.”

From Yahoo’s perspective, the deal should provide the embattled Web giant with a solid, consistent new revenue stream. For the first five years of the pact, Yahoo will take home 88 percent of search revenue generated on its own sites. Yahoo CEO Carol Bartz predicted that Yahoo will see a $500 million annual increase in operating income as a direct result of the partnership, along with $200 million in capital expenditure savings.

Clearly, under Bartz Yahoo is turning the page on its prolonged search quest, and the vaunted Project Panama platform, to focus on its investing in its core properties. Schneider said the company was looking forward to turning the page. “Yahoo has never been a search company [at its heart],” she said. “This will release us to free up investment we can now put toward things that differentiate Yahoo for consumers.”

It will not be an easy road going forward. Bartz outlined a two-and-a-half year integration process, starting hopefully with regulatory approval early next year. Ballmer expects that a certain search company might raise objections to the deal. “We expect some opposition,” he said. “We expect a competitor to be aggressive.”