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paidContent - It's Official: Yahoo-Microsoft Announce 10-Year Search/Ad Pact

This story was written by Staci D. Kramer.
Updated: The 18-month Microsoft-Yahoo (NSDQ: YHOO) saga finally enters a productive phase (regulators willing) with a 10-year global search and advertising sales pact between the two companies. The deal, much of which has already been reported, was announced formally before U.S. markets opened. Yahoo estimates that the deal will improve its annual operating income by about $500 million. The companies hope they will be able to close the deal in early 2010; Yahoo’s transition to Bing, which will be the exclusive search engine, would start about three months after close.

Full details in the release; Yahoo CEO Carol Bartz and Microsoft CEO Steve Ballmer talked about the deal during a conference call with analysts and press. In a message for Yahoo “fans” on the corporate blog, Bartz wrote: “With Microsoft powering Yahoo! Search, well be able to focus on the things we do best - being the center of peoples lives online with properties like our homepage, mail, finance, news, sports, entertainment, mobile, etc.” And, without identifying Google (NSDQ: GOOG) by name, mentioned “lopsided” competition in search, adding, “This transaction will create a healthy competitor thatll keep everyone on their toes.”

The deal includes:

—An exclusive 10-year license to Yahoo’s core search technologies; Microsoft can integrate them into its existing web search platforms.
—Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo sites but Yahoo will continue to use its technology and data in other areas (such as enhancing display advertising technology)
—Yahoo will be the exclusive worldwide sales force for both companies’ premium search advertisers but self-serve advertising for both will be fulfilled by Microsoft’s AdCenter platform with pricing for all search ads set by AdCenter’s automated auction process.
—Display advertising business and sales remain separate.
—Yahoo stays in charge of its own user experience—including search powered by Microsoft (NSDQ: MSFT).

The money:

—Microsoft will pay Yahoo with revenue sharing on traffic generated on Yahoo network of both owned and operated (O&O) and affiliate sites.
—Microsoft will pay Yahoo traffic acquisition costs (TAC) 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 with Yahoo continuing 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.
—The companies say that within two years of regulatory approval, Yahoo will be able to save about $200 million in annual capital expenditures and improve the company’s annual operating cash flow by $275 million. Yahoo’s annual operating income wil increase by roughly $500 million.

By Staci D. Kramer

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