I just got off the phone from interviewing Microsoft's Steve Ballmer and Yahoo's Carol Bartz about the online search partnership they announced this morning. Under the 10-year agreement, Microsoft's Bing will become the search engine on Yahoo's Web sites, and Yahoo will take over premium search-advertising sales for both companies.

Check out edited excerpts below from the interview.

Q: You've been touting innovation as the key benefit to consumers and regulators. Steve, you talked about how more search traffic will lead to better search relevance. Is that it? Better search relevance?

Ballmer: We are continuing to grow our team and we’ll be able to not only add talent over time, as Carol described this morning, but we can license our technology, which will speed pace of development. The more you search, the more results you have, the more relevant results you get.

The example I use is voice recognition. The best way to get better and better at voice recognition is not to hire more scientists, is to have the chance to have more and more voices. ... So is knowledge, user intent and matching in search engine.The more data we have the more we get to guide [innovation].

The flip side part of the story here is advertising. The more scale we have, the more advertisers, the more we have together

Bartz: Innovation comes a lot from focus, I think in this particular area there’s two areas we’ve chosen to focus. You’re going to focus on technology, we’re going to focus on sales.

Don’t think of sales in that normal fashion. One way advertisers are trying to figure out is how to have a better user experience. People don’t mind ads, they just want good ads. ... As [advertisers] they're trying to make their way to where the eyeballs are going, Both of us can innovate with where the ad products are.

I consider that good for industry, good for consumers, good for us. Somebody’s got to make money.

Q: Yahoo has been in search a long time and has deep engineering expertise in this area. Why give up the investment you’ve made there and what’s better about Bing’s search engine?

Bartz: It’s a very emotional thing around here. 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. That just frees me up to invest in a better portal, better display, better advertising.

We have to be realistic, it’s nice to say you want to do everything. All of us in the economic times have learned focus is more important than spreading the wealth around.

Q: Is there the potential for revenue being more than just additive from combining your search products? Is this 1 +1 = 2 or is there an opportunity for 1 + 1 = 3?

Ballmer: 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. 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.

The more relevant ads we can put on the page, the higher probably somebody will click on one. We think there’s a chance to drive revenue growth and there’s a chance to drive search, and there a chance to take out capital expenditures and operating expenses.

Q: Will there be layoffs at Microsoft as a part of this deal?

Ballmer: We have a growth plan. Earlier this year we talked about how we would be reducing by 5,000 and making investments. Search is an area of investment, some of that is in the Puget Sound area, some of that is here in the Bay Area, some of it is in China. We have a set of investments we continue to make

Part of the way we make some of that investment will be to offering jobs to a number of folks from Yahoo, which is exciting for us. That’s on product and engineering side. On the sales side obviously there are some specialists on search that will get done by Yahoo now. We have an investment on search and expertise; we won’t build that out now.

Q: Yahoo’s stock is down and that indicates some frowns among investors. What’s your message to them? Ballmer: We needed a way to ensure we got the benefits of scale. We needed to have a fair economic deal to both sides. Carol is in here hammering on me.

Bartz: It’s down for two reasons, some of them were expecting an upfront payment, where management was more interested in having more revenue through [traffic acquisition costs] where we could invest and improve profit line instead of a one-time pop. The other reason is that people hadn’t thought much about the time frame. Some of the folks likely came into the stock not that long ago.

Q: What were priorities for each of you in these negotiations? What were the things your team walked in with knowing you wanted or were not going to give up on?

Bartz: He wanted to make sure he beat me up.

Ballmer: I’ll defer on that one. I’m not sure I feel like the beater, maybe the beatee.

Ballmer: It needed to be a real basis to how we operationalize the thing. This is where I say Carol pushed harder than I would have myself understood. They actually have search partnerships. They’ve done in Japan. They have substantive ones in this ilk, relationships they brought to negotiation. Getting the fundamental deal, that happened faster since then.

Bartz: Listen, these things only work if both sides feel like they’ve won. And "won" means "fair." What I really like about watching this unfold is, sure, it doesn’t mean there weren’t spirited discussions about it, but everybody is still smiling and joking, starting with Steve and I.

Q: What are the risks with this partnership?

Ballmer: 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. [Bartz in background: "Mmm hmmm."] That’s 98 percent perspiration, not inspiration.