Microsoft-Yahoo Search Deal: The Most Important Facts (And Some Opinion)

yahoo_microsoftNow that the search deal struck between Microsoft and Yahoo has been officially confirmed by both companies, by means of a press release and a website dubbed, let’s take a step back and analyze the most important tidbits from the announcement:

As expected, Microsoft will power Yahoo Search while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ advertisers.

This will have major repercussions for the online advertising industry, where both Microsoft and Yahoo carry a lot of weight. Likely, it will take months if not years to align these important businesses. On the flip side, as Yahoo CEO Carol Bartz indicated in the press release, advertisers and publishers would benefit significantly from a unified platform and the promise of scalability all around. I believe this is indeed the core advantage of the deal in terms of being able to compete with the dominant rival to both companies, Google.

Of course the companies didn’t spell out Google in the official announcements made this morning (except for a link on the Yahoo blog post), but which other company “dominates more than 70 percent of all search”? We actually thought it was more like 65%, but the reality is that this difference in statistics isn’t nearly as important as the obvious fact that Google controls the large majority of search market share on one hand and even more of the advertising dollars that flow through search, on the other hand. Clearly, Microsoft desperately wants a piece of this cake, and it won’t settle for a small one.

Microsoft has shown it can compete in search by releasing Bing, which already has claimed its stake as a quality search engine that people actually use and enjoy using to boot. It helps that it has boatloads of cash ready to market Bing aggressively, and you can make sure that they will, too. Furthermore, the companies claim the search deal and technology exchange can lead to more innovation in search, which I agree with wholeheartedly and encourage on multiple levels. If it effectively will eat away at Google’s core business by stealing significant market share organically remains to be seen, though.

One of the most apparent facts in the announcement that was not known beforehand by any blogs or news sites, is the longevity of the agreement: 10 years, which is like an eternity in the Internet space. Microsoft will acquire an exclusive 10 year license to Yahoo’s core search technologies, which is basically the same as saying it just gained unparalleled access to the blueprint of Yahoo Search, something that can only lead to improvement of its Bing search engine. That and the fact that Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites confirms the notion that Sunnyvale has indeed given up on search in a big way.

Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process. That means there’s now Google AdWords vs. Microsoft AdCenter and Google AdSense vs. Microsoft PubCenter, and little else that matters in the search marketing arena. Take note, marketers.

Microsoft will pay traffic acquisition costs to Yahoo at an initial rate of 88% of search revenue generated on Yahoo’s owned and operated sites during the first 5 years of the agreement, and guarantee revenue per search in each country for the first 18 months following initial implementation in that country. This is huge, and it shows Redmond will continue to chase after the heart of Google, no matter how much money it takes. After those 18 month and 5 year periods, it’s unclear what will happen. Important to note is that Yahoo! will continue to syndicate its existing search affiliate partnerships.

Yahoo expects to fully implement the combined effort within 24 months following regulatory approval, which it hopes to gain in early 2010. The company estimates – based on current levels of revenue and operating expenses – that the agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million, something it sorely needs and which shareholders will be very happy about if it checks out eventually.

Already, Yahoo and Microsoft are fencing off regulatory investigation and criticism, stating clearly that they will be limiting the data shared between the companies to the “minimum necessary to operate and improve the combined search platform”, and restrict the use of search data shared between the companies.

What do you think: is this a win-win agreement for both Microsoft and Yahoo? How about users? Should Google be worried? Will the deal be approved at all?