Yahoo inks search ad pact with Google

Update 5:14 p.m. PDT: I added more comment on antitrust matters. Update 4:32 p.m. PDT: I added comments from the conference call and more partnership details. Update 3:36 p.m. PDT: I added more detail about the deal, more background, and comment from Google.

Yahoo announced a nonexclusive partnership Thursday under which rival Google will supply it with some search ads, a move that could increase Yahoo search revenue but that also gives Google even more power in the market.

Yahoo expects the deal, which was expected, to raise revenue by $800 million in its first year and to provide an extra $250 million to $450 million in incremental operating cash flow. That's a major potential boost, given that Yahoo reported revenue of $1.53 billion in its most recent quarter, after ad commissions are subtracted.

"We see this as a good, open, flexible deal and (one that) helps Yahoo be strengthened as a good longer-term competitor," Chief Executive Jerry Yang said in a conference call Thursday.

Some saw more urgent motives at work, though.

"They're using this as a tool to boost short-term cash flow," said Canaccord Adams analyst Colin Gillis. "They're trying to keep the wolves at bay."

Yahoo expects the revenue to help the company invest in its dual-pronged advertising strategy that's designed to offer advertisers an easy ability to buy text ads on search results and to buy graphical "display" ads elsewhere on Yahoo's considerable Internet properties.

"This agreement provides a source of funds to both deliver financial value to stockholders from search monetization and to invest in our broader strategy to transform display advertising and advance our starting-point objectives with users," Yahoo President Sue Decker said in a statement. "It enhances competition by promoting our ability to compete in the marketplace where we are especially well-positioned: in the convergence of search and display."

Shareholders looking for a quick payback should be prepared for a wait, though. The companies are voluntarily delaying implementation of the partnership for up to three and a half months to let the Justice Department review the deal, Yahoo said, a nod to antitrust concerns raised about the deal.

Yahoo CEO Jerry Yang

(Credit: Yahoo )

"We believe, given that it's a commercial agreement, there's not formal regulatory approval" required, Yang said. "We agreed with the Department of Justice on a voluntary basis to have them review this deal."

Antitrust scrutiny
One U.S. senator, meanwhile, urged scrutiny.

"We will closely examine the joint venture between Google and Yahoo announced today," Sen. Herb Kohl, Democratic chairman of the Senate Antitrust Subcommittee, said in a statement. "This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."

While Yahoo evidently expects a stronger future out of the deal, a tight partnership is a double-edged sword. In the long run, Yahoo likely will find its Google partnership hard to dial back even if it wants to: "The reality is it's going to be hard to unhook from the Google cash flow," Gillis said.

Under the deal, Yahoo will select the search terms for which Google will supply ads, the companies said. The ads will be displayed in the United States and Canada, and Decker took pains to say how Yahoo controls which Google results are displayed and when.

Yahoo's search ad engine, Panama, is competitive with Google's for many popular queries, but Yahoo plans to use Google with less common searches, Decker said. "Yahoo monetizes very competitively with Google for query ads but is not as competitive in the tail," she said, referring to the long statistical tail consisting of a large number of infrequent searches.

IM partnership
The partnership also extends beyond advertising. The two companies will make their instant-messaging services interoperable, lowering a barrier that separated two communities of users at the sites.

The agreement allows either party to cancel under circumstances such as an acquisition or other "change in control." However, Yahoo must pay $250 million, minus the revenue Google earned, if it's terminated within 24 months.

The partnership is a 10-year deal, a four-year initial period and two options for Yahoo to renew for three years, Decker said.

Google and Yahoo declared a limited two-week search ad deal in April a success, but even the limited partnership raised antitrust hackles at Microsoft.

Google is the leading search engine by a wide margin. Google increased its share of the U.S. search market to 68.29 percent in May at the expense of Yahoo and Microsoft, according to Hitwise.

Having more searches means more virtual real estate for ads and therefore a more desirable place for advertisers to bid for placement. Google also has worked aggressively to try to deliver only ads that are relevant to particular search queries, a move geared to increase the revenue generated per click.

Microsoft, adieu
The partnership idea came to light during Microsoft's attempt to acquire Yahoo, which put more pressure on the Internet company to improve its financial results. Both a full-on acquisition and a narrower partnership appear to be no longer an option, though.

Yahoo announced Thursday that it and Microsoft couldn't close a deal and that Microsoft wasn't interested in buying Yahoo outright even at the earlier price of $33 per share. Yahoo's shares dropped more than 10 percent, or $2.63, to $23.52.

Microsoft quickly raised antitrust concerns when the search ad test began, saying the move would reinforce Google's dominance in the search ad business. Google has countered that search ads are only a narrow part of the online ad market, and that Yahoo is the strongest company when it comes to the graphical "display" ads.

Google spoke highly of the deal on Thursday, too, though it didn't offer any projections of its financial effects.

"This commercial agreement provides Yahoo with the opportunity to deliver more relevant ads to users and provide advertisers and publishers with better advertising technology to help them succeed in their own businesses," said Google CEO Eric Schmidt in a statement. "This agreement will preserve the competitive and dynamic online advertising space."

News.com staff writer Ina Fried contributed to this report.

[FutureGuy]

MS will buy yahoo for around 25$ a share within the next few years. MS will use those billions to gain market share from Yahoo, so Yahoo will continue to lose market share to both Google and MS, this deal might get it short term cash but ithe company is doomed, especially with someone like Jerry at the helm.

[onlyauser]

Yahoo ???? Yang ????? What are they SMOKIN' ???? and is there any left for me?

LOL --- WOW!

[NPGMBR]

Ya know, I just don't understand how this will be good for Yahoo in the long run unless they can come up wiht something so great, it will take marketshare back from Google. Google is their biggets competitor and they are hooking up with them which as far as I can tell says to EVERYONE, Paname; which we spent millions to development is of less value to us than being a friend to Google. I personally think this was a stupid move on Yahoo's part but hopefully I am wrong.

[t8]

Yahoo had the chance to buy Google and turned it down. 3 years later they had another chance, except Google had 3 times the valuation, and turned it down again.

What could have been?

Anyway it is good that Yahoo never bought them.

Now Google could buy Yahoo, except that Google is so successful that antitrust rulings would never let it happen.

Another thing, a Yahoo CEO (could have been Jerry) said the following (after Netscape was annihilated by Microsoft), "you should never compete with Microsoft". Of course Google competed with Microsoft and won. Fear only crippled you Yahoo!

[The_Decider]

If Yahoo is constantly growing and adding new revenue, what does it matter if they beat Google? They don't need to beat them to be successful. As long as Yahoo keeps the destructive force known as Microsoft away from them they will do fine. All these people ripping on Yahoo forget one thing: They are eating Microsoft's lunch and growing. MS is the bit player, the non-entity in the Internet.

[someguy999]

well... one things true, either MS will but them within the next year or Google will within 2-3.

this is about the lamest thing possible. The company who bought the most successful ad engine in the world at one time (overture) is to the point that they're having now to get their ads from google.

If that's not reason enough to force yang out, nothing is.

[racoonrider]

I agree on some comments here, that it was (so far) the smarter move from MS to turn down the Yahoo! offer. (If not all planned way ahead anyway, who knows) Why the heck are they so desperate on competing in the ad bizz ? As said here before, if they would focus on their core bizz there´s more money in it in the long run. Dont forget that the internet space is very fast paced and costumers tend to easily switch to another service (yet to come) due to minimalistic barriers. Companies buying ad space etc. dont care if this is done at google / yahoo or else, simply the reach of audience must be granted. Do me a favor and ask some of your friends / family what the recently experienced when searching on the web. Nearly everyone told me (including granny etc. etc) "Am I just making this up, or has Google / Yahoo search got worse over the last months bringing up crappy ads only / no good result before the 3rd. page or so ?" In fact, just let there be anything else good enough out there people will turn away. Word of mouth will find its way.

Acutally I like MS and what they are doing, imho its o.k that they have some kind of a monopoly. What would happen if there were hundreds of OS / application standards out there? no thinking of proper working in the business sector. (Ohh, you are using word ? sorry, I have OS XYZ, cant open the .doc) - This is different to the internet : The internet lives / exists from "chaos" and we DONT need a "Google" standard here what they are trying to do.
For my part, I recently turned down a job offer by Google and 2 weeks ago at Yahoo. I dont want to work for that bunch of liars "OHHH we are sooo nice". Keep looking for a job at MS, they get my full support. At least they are trying many different sectors, e.g xbox 360. Not sucessfull, but they still try. Not many companies have the guts for that.

[NPGMBR]

You're missing the bigger picture. Yahoo CANNOT just remain in second place indefinitely. You forget that they are a publicly traded company (meaning they are working to bring a positive return to investors). If you are having trouble understanding the concept, think of it as a race. Do our olympic hopefulls strive for a silver or bronse? No, they strive for Gold. They strive to be number 1. In almost everything we do we are competing. I assure you that by working on my bachelors degree that I am working to make myslef number 1 so I can get the next position opening in my office. I'm not about to let someone else get it unless they outdo me. It is exactly the same for the nature of business.

[sadchild]

this would be like coke paying pepsi so they could make a 12 pack with 9 coke cans and 3 pepsi cans, to try and increase their sales

[flippermoon]

Yahoo wouldn't need goog if they would simply change some of there idiotic interfaces with panama. I am not sure which one is worse, panama or MSN. Goog is 10x better and easier to use. MSN will never catch up without yahoo now, even by bribing their visitors. They just dont get search - compare the ipod to the zune.

Hey yahoo here is big hint - why don't you take 5 minutes and write a copy of the ADWORDS EDITOR SOFTWARE. You will see you bid prices improve and not need to run to google for inventory. Also make you interface faster and easier to use. Just copy/paste the adwords interface, no need to reinvent the wheel.

Of course you still need to do better in SEO, but at least this would provide the cash you need to hire people to do that.

[netcan]

I think there is an underlying thing being ignored here: As long as big search engines use the same principles for displaying ads, there is no reason that Ad Platform & Search Engine need to be related.

G! is a clear leader in both, but that is obscuring the nature of this issue (it would be clearer is everyone wanted to advertise on G! via Panama0. The whole industry would be better off if the choice of platform did not affect the choice of search engine. Why not standardise and allow advertisers to choose whatever platform they prefer (Adwords, YSM, Live or third parties) and advertise on whatever search engines they want.

It would eliminate a lot of campaign management overhead, assist smaller search engines monetise & introduce some competition into the platform arena.

All these 'monetisation issues' go away if you have a separation between platform & engine.

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