Microsoft, Yahoo partner in search, gear up for Google

Until Wednesday, Bing was like a niche television series, a search engine that won critical acclaim but lacked for viewers, the "Mad Men" of the Internet.

That changed when Microsoft and Yahoo announced a new partnership Wednesday that would give Bing wide exposure across Yahoo's sites, which half of all Internet users visit daily.

Google still dwarfs both Yahoo and Microsoft when it comes to search traffic, and the deal faces regulatory scrutiny and a long timeline that won't bring changes until mid-2010.

The deal resolved months, even years, of discussion, courtship and speculation about two of the tech industry's best known players joining forces to alter the landscape of online media.

It also represents an early breakout for Bing, which was redesigned, rebranded and relaunched only two months ago. Microsoft's previous search engine, Live Search, was a mere spear carrier when the company began pursuing a $47.5 billion takeover of Yahoo 18 months ago.

"Clearly this is a great endorsement for Bing that this will be the de facto search engine across the properties," said Brent Thill, director of software research at Citi Investment Research. "That's probably the most significant" piece of the agreement.

Microsoft CEO Steve Ballmer, who two weeks ago was boasting of Bing's mojo and momentum, squarely focused his comments Wednesday on the potential for joint innovation.

"We are continuing to grow our team and we'll be able to not only add talent over time ... but we can license their technology, which will speed pace of development," Ballmer said in a phone interview that also included Yahoo CEO Carol Bartz. "The more you search, the more results you have, the more relevant results you get."

Under the agreement, Yahoo will give up continued development of its search technology, engineering the company pioneered and grew in its Sunnyvale, Calif., headquarters.

Yahoo will take over both companies' sales for premium search advertisers, who pay for ad listings at the top and to the right of search results.

It wasn't clear what the deal's implications are for jobs at Microsoft or Yahoo.

"It's a very emotional thing around here," said Bartz on the decision to give up search technology.

"The reality is pretty simple. We have two giants who are willing to go at it with each other and spend a lot of money. In essence, we can get virtually all of our search revenue at no cost because Microsoft wants to make the investment and wants to win."

Yahoo will get 88 percent of search advertising revenue for the first five years, and Microsoft will pay Yahoo to license Yahoo's core search technology.

Smaller advertisers for both companies will use Microsoft's self-service sales platform AdCenter. And the two companies will conduct their own sales for display advertising, such as banner ads.

By partnering with Yahoo, Bing, which has 8.4 percent of search traffic, will gain Yahoo's 19.6 percent share, adding up to about 30 percent. By itself, Bing was growing less than a half percent a month.

Google, which Ballmer and Bartz referred to Wednesday only as "they" and "the competitor," attracts 65 percent of search traffic, according to the latest data from research firm comScore.

Google said competition is good. In a statement, spokesman Adam Kovacevich said, "There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We're interested to learn more about the deal."

Google and Yahoo sought to partner last year, but Google withdrew after federal officials had antitrust concerns.

Wednesday, Microsoft General Counsel Brad Smith said the company would begin filing with antitrust regulators in the U.S. and Europe.

"There's a compelling case this is going to increase competition," given the size of Google's market share, Smith said in a conference call.

Microsoft's stock moved a little Wednesday, gaining 1.4 percent to $23.80 while Yahoo shares fell 12 percent to $15.14.

"It's down for two reasons," Bartz said. "Some of them [shareholders] were expecting [Yahoo to receive] an upfront payment. The other reason is that people hadn't thought much about the time frame."

Under the deal, Yahoo expects to generate $500 million more in operating income annually and save $200 million in capital expenditures.

Ballmer said in the next two years Microsoft plans to spend a couple hundred million dollars to implement the agreement, and that the scale of the combined efforts would increase search-ad revenue beyond what the two are earn separately now.

"There is an expectation that by putting our volume together, we both have a chance to not only increase share, but we improve the product and we improve its monetization," he said. "The more people bidding on a key word, which we think we can scale, the higher the auction price should be therefore increased monetization becomes positive."

Wednesday's announcement ends 18 months of off- and on-again discussions between the two companies. Microsoft tried to buy Yahoo with a $47.5 billion acquisition bid announced Feb. 1, 2008. Yahoo's board rejected the bid and months of negotiations were unsuccessful. In May 2008, Ballmer withdrew the bid.

The two companies hope to close the partnership in early 2010, with the first changes taking place three months later. The full implementation of the agreement would take two years.

While saying the deal was a positive development, a few analysts maintained a wait-and-see perspective. "It will take time. It's good; it's not great yet," Citi analyst Thill said.

Ballmer said the biggest risk of the partnership was the ability to make it work in real life.

"We gotta execute right like crazy. This will require the best style of execution that we've ever shown, and I hesitate to say that what Yahoo has ever shown," Ballmer said. "That's 98 percent perspiration, not inspiration."

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com