July 29, 2009 – IR Summary/NYT-A big competition has taken birth, Microsoft and Yahoo both have announced a partnership in Internet search and advertising on Wednesday morning so as to create a stronger rival to the industry powerhouse Google.

The Microsoft-Yahoo pact is measured step that represents a pragmatic division of duties between the two companies instead of the blockbuster deal Microsoft made last year, when it bid $47.5 billion to buy Yahoo. That hostile offer was ultimately rejected by Yahoo, and its collapse and the uncertain aftermath for the Web company led to a management change and the replacement of co-founder Jerry Yang by Carol Bartz, an outsider who is now Yahoo’s chief executive.

Under the pact, Microsoft will provide the underlying search technology on Yahoo’s popular Web sites. The deal provides a lift for Microsoft’s recent overhaul of its search engine, renamed Bing, which has won praise and favorable reviews, after years of falling further and further behind Google.

Running such a search system proves expensive, and Microsoft can now filter more searches through the Bing technology infrastructure. It expects to deliver better answers to search queries over time as well by learning from more peoples’ queries.

For Yahoo, the move furthers the strategy under Ms. Bartz to focus the company on its strengths as a producer of Web media sites, from finance to sports, as a marketer and a leader in on-line display advertising that accompanies published Web sites.
The terms of the 10-year agreement call for Microsoft to license Yahoo’s search technologies, and Yahoo will initially receive a lucrative 88 percent of search-generated ad revenue.

The advertising work will be split. Yahoo will be the exclusive ad force for premium search advertisers who bargain to negotiate rates and deals. But Microsoft Ad-Center automated search market for smaller customers whose prices for search advertising are set by the automated auction process.

Together, Microsoft, the No. 3 provider of search, and Yahoo, No. 2, will have about 28 percent of search traffic in the United States. Even so, the partnership will still trail well behind Google, which holds about two thirds of the market.

In statement before a morning conference call, Steven A. Ballmer, Microsoft’s chief executive, said, “Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers and real consumer choice in a market currently dominated by a single company.”

Wednesday’s agreement also ends one of the longest and most tumultuous courtships in the technology industry, finally giving Microsoft a prize it has coveted for more than three years. It forced Mr. Ballmer into a sometimes frustrating wooing of three of his counterparts at Yahoo.

Mr. Ballmer began wooing Yahoo as early as 2006 when Terry Semel was that company’s chief executive. Unable to get Yahoo interested, early last year Microsoft made a hostile $47.5 billion bid to take over Yahoo, which by then was under the leadership of its co-founder Jerry Yang.

After tense, months-long negotiations, the deal was derailed, in part by Mr. Yang’s reticence, and in part by the intervention of Microsoft’s arch-rival Google, which offered Yahoo an alternative advertising partnership. But the Google-Yahoo alliance itself fell apart in November when Google abandoned it in the face of opposition from the Department of Justice.

That left Yahoo jilted and opened the door again for Microsoft to renew its courtship, with Mr. Ballmer this time playing suitor to Ms. Bartz.

During that time, Google has continued to race ahead, gaining share in the search business, which is worth $12 billion a year in the United States alone, at the expense of both Yahoo and Microsoft.

Even united, Yahoo and Microsoft will continue to be dwarfed by Google in search. Yet the combination of Yahoo and Microsoft in online search creates a far more powerful counterweight to Google, one that will be welcomed by many in the advertising industry, which has watched Google rapidly become the world’s largest seller of advertising with a mix of fascination and foreboding. 

For Microsoft, the combination with Yahoo is the quickest way to increase use of its newly revamped and rechristened search engine, Bing. While the new service has received good reviews, and advertisers have long said that Microsoft’s search advertising system is effective, many do not bother to advertise on it because the traffic they receive from that effort is too small.

By tripling its usage through the alliance with Yahoo, Microsoft has a better shot at luring more advertisers, which, in turn, helps the company increase the revenue it earns from searches. More