Microsoft, Yahoo! agree on Internet search partnership

by Jessica Mintz and Michael Liedtke

Associated Press

Wednesday July 29, 2009

Microsoft Corp. appears to have finally persuaded Yahoo Inc. that together they would have a better chance of mounting a meaningful challenge to Google Inc.'s dominance of online advertising.

Details of a long-rumored Microsoft-Yahoo alliance were expected to be announced Wednesday, a person with knowledge of the talks told The Associated Press. This person spoke Tuesday night on condition on anonymity, confirming earlier reports, because the deal was not yet final.

The deal does not appear to call for Microsoft to pay Yahoo in advance, which could disappoint its investors. Yahoo Chief Executive Carol Bartz had said she would join forces with Microsoft only for "boatloads of money."

Instead, the companies would share revenue generated by search ads on their Web sites. Yahoo would use Microsoft's search engine, Bing, and it is likely - though not certain - that a "powered by Bing" message will appear on Yahoo's highly trafficked pages, according to the person who described the talks to the AP.

The companies would also use Microsoft's advertising technology to deliver appropriate ads alongside search results, while Yahoo would handle the ad sales and customer service.

The person with knowledge of the talks said it is not clear whether the final deal will also cover sales of billboard-style "display" ads, or what will happen to Microsoft's own ad sales team.

Microsoft, the world's largest software maker, has been courting Yahoo for several years in hopes of expanding its share of the online search market.

After being repeatedly rebuffed, Microsoft launched an unsolicited bid to buy Yahoo in its entirety. With co-founder Jerry Yang at the helm, Yahoo put up such staunch resistance that Microsoft withdrew its last offer of $47.5 billion, or $33 per share, nearly 15 months ago.

Yahoo shares have never gotten close to that level again, and the company's market value was around $24 billion this week.

Microsoft is counting on Yahoo's search engine, which ranks No. 2 with a worldwide market share of 8 percent, to pose a more formidable challenge to Google, which holds 67 percent of the global audience, according to the most recent data from research firm comScore Inc. In the United States, Google's share is 65 percent, compared with roughly 20 percent for Yahoo.

Despite spending billions to upgrade its search engine, Microsoft still held just a 3 percent share worldwide and 8 percent in the U.S. in the most recent comScore tally.

The deal is likely to draw antitrust scrutiny. Last year, the U.S. Justice Department analyzed Yahoo's plans for a search advertising partnership with Google before deciding that it would give Google too much control over the market - a conclusion loudly supported by Microsoft. The opposition forced Google and Yahoo to scuttle their deal.

Microsoft is doubling down on Internet search at the same time Google is attacking Microsoft's bread-and-butter business of making software for personal computers.

Google is working on a free operating system for inexpensive personal computers in a move that could threaten Microsoft's Windows franchise. If it gains traction, Google's alternative, called Chrome OS, could divert some revenue from Microsoft while the software maker is trying to grab more of the money pouring into search advertising.

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