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Microsoft, Yahoo! Change Search Landscape †

• Global Deal Creates Better Choice for Consumers and Advertisers
• Yahoo/MS Press Release

SUNNYVALE, Calif. & REDMOND, Wash., Jul 29, 2009 (BUSINESS WIRE) -- Yahoo! and Microsoft announced an agreement that will improve the Web search experience for users and advertisers, and deliver sustained innovation to the industry. In simple terms, Microsoft will now power Yahoo! search while Yahoo! will become the exclusive worldwide relationship sales force for both companies' premium search advertisers.

For Web users and advertisers, this deal will accelerate the pace and breadth of innovation by combining both companies' complementary strengths and search platforms into a market competitor with the scale to fuel sustained development in search and search advertising. Users will find what they care about faster and with more personal relevance. Microsoft's competitive search platforms will lead to more value for advertisers, better results for Web publishers, and increased innovation and efficiency across the Internet.

Under this agreement, Yahoo! will focus on its core business of providing consumers with great experiences with the world's favorite online destinations and Web products.

"This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development," said Yahoo! Chief Executive Officer Carol Bartz. "Users will continue to experience search as a vital part of their Yahoo! experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities and mobile experiences."

Providing a viable alternative to advertisers, this deal will combine Yahoo! and Microsoft search marketplaces so that advertisers no longer have to rely on one company that dominates more than 70 percent of all search. With the addition of Yahoo!'s search volume, Microsoft will achieve the size and scale required to unleash competition and innovation in the market, for consumers as well as advertisers.

Microsoft Chief Executive Officer Steve Ballmer said the agreement will provide Microsoft's search engine, Bing, the scale necessary to more effectively compete, attracting more users and advertisers, which in turn will lead to more relevant ads and search results.

"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," said Ballmer. "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo! will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo! know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search."

"This deal fits the long-term strategic direction of Yahoo! to remain the world's leading online media company and Carol Bartz has the full and unanimous support of the Yahoo! Board behind this deal," said Roy Bostock, chairman, Yahoo! Inc. "This is a significant opportunity for us. Microsoft is an industry innovator in search and it is a great opportunity for us to focus our investments in other areas critical to our future."

The key terms of the agreement are as follows:

• The term of the agreement is 10 years;
• "Microsoft will acquire an exclusive 10 year license to Yahoo!'s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing Web search platforms;"
• "Microsoft's Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology;"
• "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;"
• "Each company will maintain its own separate display advertising business and sales force;"
• "Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology;"
• "Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!'s network of both owned and operated (O&O) and affiliate sites;1)Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 percent of search revenue generated on Yahoo!'s O&O sites during the first five years of the agreement; and 2)Yahoo! will continue to syndicate its existing search affiliate partnerships."
• "Microsoft will guarantee Yahoo!'s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country;"
• "At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately 200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million; and"
• "The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today."

The agreement does not cover each company's Web properties and products, email, instant messaging, display advertising, or any other aspect of the companies' businesses. In those areas, the companies will continue to compete vigorously.

The transaction will be subject to regulatory review. The agreement entered into today anticipates that the parties will enter into more detailed definitive agreements prior to closing. Microsoft and Yahoo! expect the agreement to be closely reviewed by the industry and government regulators, and welcome questions. The companies are hopeful that closing can occur in early 2010.

The companies have established a website at http://www.choicevalueinnovation.com to provide consumers, advertisers and publishers with additional information about the benefits of the agreement.

Conference Call - 5:30 a.m. PDT, Wednesday, July 29

Yahoo! and Microsoft will host a conference call with Yahoo! CEO Carol Bartz and Microsoft CEO Steve Ballmer to discuss the agreement at 5:30 a.m. Pacific/8:30 a.m. Eastern Time today. To listen to the call, please dial 1-866-5... in the U.S. and Canada; +1-617-... international, reservation number: 47968026. A live webcast of the call can be accessed through Yahoo!'s Investor Relations website at http://yhoo.client.shareholder.com/results.cfm. In addition, an archive of the webcast will be available through the same link. An audio replay of the call will be available for two weeks following the conference call by calling 1-888-2... in the U.S. and Canada; +1-617-... international, reservation number: 91217610.

Non-GAAP Financial Measures

This release refers to operating cash flow (operating income before depreciation, amortization of intangible assets, and stock-based compensation expense, or OCF), which is a non-GAAP financial measure. The most comparable GAAP measure is income from operations. The estimated annual OCF benefit of 500 million less approximately $225 million of estimated annual savings in depreciation, amortization and stock-based compensation expense.

About Yahoo!

Yahoo! Inc. (Nasdaq "YHOO") is a leading global consumer brand and one of the most trafficked Internet destinations worldwide. Yahoo! is where millions of people go every day to see what is happening with the people and things that matter to them most. Yahoo! helps marketers reach that audience with its unique and compelling advertiser proposition. Yahoo! is headquartered in Sunnyvale, California. For more information, visit http://pressroom.yahoo.com or the company's blog, Yodel Anecdotal at http://yodel.yahoo.com.

"Owned and Operated sites" refers to Yahoo!'s owned and operated online properties and services.

"Affiliate sites" refers to Yahoo!'s distribution network of third-party entities who have integrated Yahoo!'s advertising offerings into their websites or their other offerings.

This press release and its attachments contain forward-looking statements that involve risks and uncertainties concerning Yahoo!'s expected financial performance (including without limitation the quotations from management in this press release), as well as Yahoo!'s strategic and operational plans. Actual results may differ materially from the results predicted and reported results should not be considered as an indication of future performance. The potential risks and uncertainties include, among others, the expected financial and other benefits of the agreement with Microsoft may not be realized, including as a result of actions taken by United States or foreign regulatory authorities and the response or acceptance of the agreement by publishers, advertisers, users, and employees and Yahoo!'s strategic and business partners; the impact of management and organizational changes; the implementation and results of Yahoo!'s ongoing strategic and cost initiatives; Yahoo!'s ability to compete with new or existing competitors; reduction in spending by, or loss of, marketing services customers; the demand by customers for Yahoo!'s premium services; acceptance by users of new products and services; risks related to joint ventures and the integration of acquisitions; risks related to Yahoo!'s international operations; failure to manage growth and diversification; adverse results in litigation, including intellectual property infringement claims; Yahoo!'s ability to protect its intellectual property and the value of its brands; dependence on key personnel; dependence on third parties for technology, services, content, and distribution; and general economic conditions and changes in economic conditions;All information set forth in this press release and its attachments is as of July 29, 2009. Yahoo! does not intend, and undertakes no duty, to update this information to reflect future events or circumstances. More information about potential factors that could affect the Company's business and financial results is included under the captions "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, which are on file with the SEC and available on the SEC's website at www.sec.gov. Additional information will also be set forth in those sections in Yahoo!'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, which will be filed with the SEC in the third quarter of 2009.

This press release and its attachments also contain financial projections that are necessarily based upon a variety of estimates and assumptions which may not be realized and are inherently subject, in addition to the risks identified in the forward-looking statement disclaimer, to business, economic, competitive, industry, regulatory, market and financial uncertainties, many of which are beyond Yahoo!'s control.There can be no assurance that the assumptions made in preparing the projected financial impact will prove accurate.Accordingly, actual results may differ materially from the projected financial impact.In addition, all projections exclude anticipated reinvestment by Yahoo! in its non-search business.

Yahoo! and the Yahoo! logos are trademarks and/or registered trademarks of Yahoo! Inc. All other names are trademarks and/or registered trademarks of their respective owners.

About Microsoft

Founded in 1975, Microsoft (Nasdaq "MSFT") is the worldwide leader in software, services and solutions that help people and businesses realize their full potential.

Note to editors: If you are interested in viewing additional information on Microsoft, please visit the Microsoft Web page at http://www.microsoft.com/presspass on Microsoft's corporate information pages. Web links, telephone numbers and titles were correct at time of publication, but may since have changed. For additional assistance, journalists and analysts may contact Microsoft's Rapid Response Team or other appropriate contacts listed at http://www.microsoft.com/presspass/contactpr.mspx.

Yahoo! Inc.

Supplemental Information Regarding Projected Incremental Impact of Microsoft Search Agreement

:1:Gross profit impact consists of increased revenue net of Microsoft's share of Yahoo!'s search revenue. The increased revenue is attributable to the scale resulting from the combination of the Yahoo! and Microsoft search marketplaces. :2:Operating expenses impact represents savings from reductions in spending on Yahoo!'s search technology.

:Note: All estimates represent the projected annual financial impact of the agreement following its full implementation, which is expected to occur within 24 months of regulatory approval, and are based on Yahoo!'s current levels of revenues and operating expenses. In addition, all projections exclude anticipated reinvestment by Yahoo! in its non-search business. The projections are necessarily based upon a variety of estimates and assumptions which may not be realized and are inherently subject, in addition to the risks identified in the forward-looking statement disclaimer, to business, economic, competitive, industry, regulatory, market and financial uncertainties, many of which are beyond Yahoo!'s control. There can be no assurance that the assumptions made in preparing the projected financial impact will prove accurate. Accordingly, actual results may differ materially from the projected financial impact.

SOURCE: Yahoo! Inc.

Microsoft Media Relations Contact:Waggener Edstrom Worldwide Rapid Response Team, +1 (503) 443-7070 or Microsoft Investor Relations Contact: Bill Koefoed, +1 (425) 706-3703 general manager, Investor Relations or Yahoo! Media Relations Contact:Yahoo! Press and Industry Analyst hotline, +1 (408) 349-4040 or Yahoo! Investor Relations Contact:Cathy LaRocca?, +1 (408) 349-5188 senior manager, Investor Relations

• Copyright Business Wire 2009

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Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer †

• By NICK WINGFIELD
• JULY 30, 2009

REDMOND, Wash. -- Microsoft Corp.'s deal to join forces with Yahoo Inc. in the Internet search and advertising businesses could create a counterweight to the online muscle of Google Inc. It may also help Steve Ballmer end the worst slump in his career at the helm of Microsoft.

For the past several years, Microsoft has been stung by missteps, including a clumsy defeat last year in Mr. Ballmer's unsolicited bid to acquire all of Yahoo. Microsoft's Windows Vista operating system was pilloried for technical problems, and its videogame ambitions were nearly thwarted by widespread malfunctions of its Xbox 360 console.

Yet amid the bad news, there are signs that things may be finally starting to look up for Microsoft.

Reviewers are praising the test version of its Windows 7, which will go on sale in final form Oct. 22. Microsoft's Xbox business is getting buzz for innovation. Its new search engine, called Bing, has earned plaudits and market share since it launched last month.

"Suddenly you don't feel like a moron for saying you use a Microsoft product," says Keith Richman, chief executive of Internet video site Break.com and a fan of Bing.

And now Mr. Ballmer, Microsoft's CEO, has reached a deal with Yahoo that, if successful, could give him a big boost in his company's rivalry with Google. Under their 10-year agreement, Microsoft's Bing will become the Internet search service on Yahoo, while Yahoo will sell advertisements that run next to the search results to large companies on behalf of both Microsoft and Yahoo. The agreement could catapult Microsoft's share of online searches conducted by U.S. consumers to nearly 30% from just over 8.4%, compared with Google's 65% of the market, based on market estimates by Comscore Inc.

While the deal is likely to face scrutiny from regulators concerned about its effects on competition, Microsoft and Yahoo argue the pact is the only way to create a viable alternative to Google, a company that harvests the bulk of the lucrative online advertising market. They say the deal will help advertisers reach a bigger audience than they can if Yahoo and Microsoft search efforts remain separate.

For Mr. Ballmer, the agreement provides some redemption in an area he has stressed is critical to Microsoft's future. In an interview, he says the Yahoo deal received "more of my personal attention over the last 18 months than anything else we're involved with," including focusing on its most important new product in years, Windows 7. "It's a big deal," he says.

Microsoft has big challenges. Mr. Ballmer, 53 years old, runs a company of nearly 100,000 employees across an often unwieldy array of businesses, including a mobile-phone group that has fallen far behind Apple Inc.'s iPhone. Microsoft's Windows and Office businesses still face long-term threats such as Google's recently announced Chrome OS for powering inexpensive laptops and a shift to online versions of applications that could jeopardize many of Microsoft's software businesses.

A slowdown in technology spending prompted the company to eliminate 5,000 jobs earlier this year -- the first significant layoffs in its history. That slowdown also caused the company to report its first-ever decline in annual revenue last week. Investors had bid the company's stock up on anticipation of new products coming, but slammed the shares after last week's disappointing earnings.

Still, there are glimpses of a sentiment shift about the world's biggest software company. One of the most telling came earlier this month, on Mini-Microsoft, a blog written by an anonymous Microsoft employee in product management that is popular with company employees. For the past five years, the author has slammed Microsoft as a flabby, inefficient bureaucracy losing ground, but Windows 7, Bing and other recent efforts changed his mind. "I've got to say: in my opinion, Microsoft has turned The Corner," he wrote.

Even before the Yahoo deal, Mr. Ballmer was starting to get some respect in search, the business that turned Google into a powerhouse. Last year, the Microsoft group that runs its search business was a shambles, with a brand name -- Live Search -- that few consumers could remember and an eroding share of searches. Its top executives were distracted by the bungled bid for Yahoo, putting on hold improvements -- picking a more memorable name, for instance.

In the ultimate insult, even most of Microsoft's employees used Google to conduct Internet searches from computers on the company's internal network. "I don't think they felt like they could be evangelists about the product that we had," says Yusuf Mehdi, senior vice president for the online audience business group at Microsoft. Now, he says, most Microsoft employees are using Bing. [Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer]

With its Bing search engine, the company has focused on making results more consumer friendly -- for example, by using software formulas to tell searchers for flights from a local airport whether ticket prices are likely to rise in the coming days. The Bing name is, in the words of Mr. Mehdi, "verbable" in the same way Google is.

The new site was launched in June and backed up with a $100 million advertising campaign. According to Comscore, Microsoft's share of U.S. online searches in June increased to 8.4% from 8% the prior month, growth that appears to have come at the expense of Yahoo, which declined to 19.6% in June from 20.1% the prior month.

Robert Murray, CEO of search marketing firm iProspect.com, say his clients are seeing significant improvements in results from ads on Microsoft's search engine since Bing launched; they are beginning to invest more money with Microsoft, he says.

Even with the growth of Bing, Mr. Ballmer held out for a Yahoo deal, seeing it as the only way to create a serious competitor to Google. In a joint interview, Mr. Ballmer and Ms. Bartz said the conversations between the two companies began to pick up about a search deal after January, when Ms. Bartz took over as CEO of Yahoo. Mr. Ballmer said the broad concept of the current deal began to take shape about a month ago.

Under their agreement, the cost of investing the hefty sums of money required to constantly improve the search technology used by both companies will be Microsoft's burden, while Yahoo will receive from Microsoft 88% of the revenue generated from searches conducted on Yahoo's site.

While its Internet efforts have nabbed most of the attention lately, Mr. Ballmer's greatest challenge is in reviving its biggest cash-cow business -- Windows, which delivered more than half of its $20.4 billion in operating profit during its last fiscal year, ended June 30. It is unclear yet whether the company can again energize PC sales as it has in the past with new versions of its operating system, as the economy dampens spending and more consumers rely on cheaper devices like mobile phones for computing chores.

Windows Vista became a symbol of all that was wrong with Mr. Ballmer's Microsoft: When it came out nearly three years ago, the much-delayed software suffered from sluggish performance; it was slow to start up and shut down, especially on less powerful computers. It also had problems working with common devices like printers and digital cameras.

The problems created an opening that Microsoft's rival Apple relentlessly exploited in its Mac versus PC advertising campaign that depicted Windows in the guise of a bumbling nerd. According to Gartner Inc., Apple increased its share of new computer shipments in the U.S. to 7.2% in the first quarter from 4.2% in the same period three years earlier, though the vast majority of computers still run on some form of Windows.

View Full Image Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer Getty Images

Microsoft hopes its new Project Natal, demonstrated in Los Angeles in June, will help kick up X-box sales. Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer

Microsoft executives insist Vista got a bum rap based on early problems that were fixed through software updates. Still, Mr. Ballmer says "there's more negative noise on Vista than I would have liked."

Complaints about Vista were dispiriting to Microsoft employees, adding to a sense of malaise. At a company sales meeting in early 2008, Eugenio Beaufrand, a veteran Microsoft executive in China, grabbed a microphone during a question-and-answer session with executives. In an emotional speech, he demanded to know why the company wasn't doing more to combat the troubles of Windows Vista.

"He was fired up," says Bill Veghte, senior vice president of Microsoft's Windows business, one of the executives there.

Frustrated with the delays in Vista, Mr. Ballmer in 2006 put Steven Sinofsky, a veteran Microsoft executive with a reputation for shipping regular updates to Microsoft's Office software on time, in charge of developing Windows 7. Among his marching orders: Work more closely with hardware partners to make sure it worked well with other devices.

Late last year, Microsoft released a test version of Windows 7 to the public. Early reviews have been positive; it starts up and runs quickly, even on inexpensive laptops called netbooks that are the strongest part of the PC business right now.

"It seems like what Vista should have been," says Michael Cusumano, a business professor at the Massachusetts Institute of Technology and author of several books on Microsoft's strategy. "They took a couple more years and got it right."

Retailers are hoping Windows 7 will give a lift to PC sales. "This new operating system isn't just a 'Vista that works,'" Best Buy Co. said in a recent internal message.

In a June survey of 100 information technology executives at large companies by Goldman Sachs, 76% of respondents said they eventually plan to upgrade their companies to Windows 7, indicating stronger demand for the software than for Windows Vista, which Goldman estimates is deployed on only 20% of business machines. Chris Dill, chief information officer of the Portland Trail Blazers, calls Windows Vista a "dud" and says the organization largely skipped it. Mr. Dill says he is enthusiastic enough about Windows 7 that he plans to upgrade most of the 300 PCs he is responsible for to the new software within six months. [Yahoo Tie-Up Is Latest Sign Tide Turning for Microsoft's Ballmer]

Executives inside and outside Microsoft credit Mr. Ballmer with wresting the company out of its torpor. He shook up the company's Internet division, hiring Qi Lu, who used to lead Yahoo's search efforts and now is president of Microsoft's online services division. Larry Heck, a former Yahoo vice president, chose a Microsoft job recently over opportunities at Google Inc. and other companies, he says.

"It's more fun, frankly, to make a bigger impact than being at a place that's already number one in the space," Mr. Heck says.

Some longtime Silicon Valley executives are happy about Microsoft's improvements in search because they see a need for a counterweight to Google. "People no longer perceive Microsoft as the enemy," says Jeff Bonforte, CEO of Internet startup Xobni Corp. and a former Yahoo executive. "On the Internet, Microsoft isn't that powerful."

Long a follower of the innovation of others, Microsoft is even getting credit for some technology breakthroughs. In June at the E3 games conference in Los Angeles, the company generated buzz with a new motion-sensing video camera called Project Natal Microsoft it is developing for the Xbox 360. The technology is designed to allow people to control on-screen action -- driving cars, boxing, kicking soccer balls -- by simply mimicking those movements with their bodies. Project Natal won't require users to hold a motion-sensing controller in their hands as Nintendo Co.'s Wii does.

That could give the Xbox 360 a boost in its push to further outpace Sony Corp.'s PlayStation? 3 and to catch up to the Wii, the market leader in the console business. "Microsoft stole E3 and may have already won the motion-control wars with the announcement of Project Natal," the popular Gizmodo gadget blog declared in June. Such talk has helped Microsoft gain distance from a near calamity two years ago, in which it was forced to take a $1.1 billion charge to cover the cost of repairing defective Xbox 360s.

Microsoft executives say they expect technology spending to improve next year and the company's sales should further get a lift from the release of Office 14, a new version of its well-known package of application software that has become a big money-maker for the company.

Microsoft employees say they've noticed a change at get-togethers with people outside the company. Over the past few years Tim O'Brien, director of the platform strategy group at Microsoft, said he often experienced an attitude from friends that he described as: "You're Microsoft, let me pound you."

When Mr. O'Brien went to his 25-year college reunion in Indianapolis recently, in contrast, he was congratulated about Windows 7 and Bing. "It was a completely different vibe," he says.

• Write to Nick Wingfield at nick.wingfield@wsj.com

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Yahoo-Microsoft to link up †

• By Joseph Menn in Las Vegas, Richard Waters in San,Francisco and Tim Bradshaw in London
• Published: July 30 2009 03:00 | Last updated: July 30 2009 03:00

After more than two years of intense pursuit, Microsoft yesterday struck a deal with Yahoothat makes the software group the most credible threat to Google's dominance in the search business.

Under the terms of the 10-year alliance, Microsoft will run the technology behind both its own Bing search engine and Yahoo's search results, while Yahoo will handle the direct sales of sponsored advertising.

In essence, the wealthier Microsoft will shoulder most of the costs of investing in search, freeing Yahoo to focus on building its audience and attracting advertisers. Yahoo said it expected the savings in the agreement to produce an additional $275m in cash flow.

Carol Bartz, Yahoo's chief executive, said the agreement came with "boatloads of value for Yahoo, our users, and the industry, and I believe it establishes the foundation for a new era of internet innovation and development".

Yahoo stockholders, though, were alarmed that their company was surrendering its technology position while gaining far less than anticipated annual savings, which had been estimated at as much as 15.32 in early-afternoon trading. Shares in Microsoft were steady at 435.17.

"This clearly reflects the fact that we feel a need to double down in search," Microsoft's chief executive Steve Ballmer told the Financial Times. Google has more than 70 per cent of the world market for paid search results and more than 92 per cent in western Europe.

The deal will face intense antitrust scrutiny, since opposition in Washington blocked a proposed Yahoo search deal with Google last year. But Microsoft general counsel Brad Smith said he knew of no other case where a company with as great a share as Google - which mounted an all-out attack on Microsoft's unsolicited bid last year - had objected to two smaller companies combining forces.

Several advertisers who had complained about a Yahoo-Google tie-up praised the new partnership, saying it would provide a real alternative to Google. "It is very welcome for our clients as it brings more balance to the search marketplace and may moderate pricing," said Sir Martin Sorrell, chief executive of WPP, the world's largest advertising agency. "It is something we have been actively encouraging to happen. I think regulators will welcome it too."

Google will not be making a concerted assault on the latest plan, according to one person familiar with its thinking. In a cautious statement, it said: "There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We're interested to learn more about the deal."

The arrangement is a more modest one than the takeover offer that collapsed last summer, and Microsoft investors were relieved at the lack of expense.

Both chief executives warned that that full integration of the services, which will keep Microsoft's AdCenter? for self-service ad orders, could take two years past the anticipated regulatory approval in early 2010.

• Lex, Page 12 A new force in search, Page 14 www.ft.com/usdailyview
• Copyright The Financial Times Limited 2009

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Microsoft and Yahoo challenge Google: Bing it on †

• By MICHAEL LIEDTKE and JESSICA MINTZ The Associated Press
• Wednesday, July 29, 2009 5:50 PM

SAN FRANCISCO -- Microsoft finally persuaded Yahoo to surrender control of the Internet's second most popular search engine and join it in a daunting battle - taking on the overwhelming dominance of Google in the online advertising market.

A 10-year deal announced Wednesday gives Microsoft its best shot yet to show its new search technology, Bing, is as good as or better than Google's. Microsoft also hopes to use Yahoo to divert sales from Google, which generates more than $20 billion a year from ads.

Gaining access to Yahoo's audience would instantly more than triple Bing's U.S. market share to 28 percent. That's still a far cry from the remarkable 65 percent of U.S. searches handled by Google, according to the research firm comScore Inc.

By joining forces, Microsoft and Yahoo are betting they will be able to focus on their respective strengths. By turning over responsibility for search technology to Microsoft, Yahoo can concentrate on sales of billboard-style advertising on the Web - and figuring out how to keep luring traffic to its Web sites, which already attract more than 570 million people worldwide every month.

While the agreement shapes up as a potential boon for Microsoft, it was greeted in the stock market as a letdown for Yahoo. Just 14 months ago, Microsoft dangled 47.5 billion bid to buy the entire company.

Yahoo has been struggling so badly since then that Microsoft isn't paying any money in advance. Instead, it will give Yahoo 88 percent of the search ad sales made on its Web site, above the usual commission of 70 to 80 percent.

By spending less on its own search technology, Yahoo expects to boost its annual operating profit by about $500 million - but not until 2012, when the two companies expect to have all the pieces of a complex technological puzzle in place.

"I think a lot of people are kind of looking at the numbers and seeing a lot of question marks where they expected to see exclamation points," said Scott Kessler, a Standard & Poor's equity analyst.

Yahoo Inc. shares plunged 15.14 as investors expressed disappointment over the absence of an immediate windfall. Microsoft Corp. shares gained 33 cents to 3.61 to $436.24.

It took Carol Bartz, Yahoo's chief executive, just six months to strike a deal with Microsoft - something that neither of her predecessors, Terry Semel and Yahoo co-founder Jerry Yang, seemed interested in doing.

"This move makes up for a lot of the stupid mistakes made by the preceding administration," said technology analyst Rob Enderle, who thinks Yahoo will be able to devote more energy to developing services to compete with online hangouts like Facebook.

Shortly after her arrival, Bartz made it clear she was willing to farm out Yahoo's search engine for "boatloads of money" as long as she as thought the company would still get adequate information about its users' interests. Bartz predicted the deal will enrich the company over the long run.

"This agreement comes with boatloads of value for Yahoo, our users, and the industry," Bartz said.

Yahoo will have limited access to the data on users' searches, which yield insights that can be used to pick out ads more likely to pique a person's interest. The value of that information is why Microsoft wants to process more search requests.

Microsoft CEO Steve Ballmer could barely contain his excitement as he gushed about finally getting Yahoo on his side - something he has been trying to do for at least three years.

"I am very enthusiastic," Ballmer said in an interview. "This is what I have basically been saying for the past 18 months: The world will be better served for consumers, advertisers and publishers, and there will be more competition for Google, if we can somehow figure out how to get Microsoft and Yahoo together in search."

Antitrust regulators plan to review the agreement to make sure it doesn't lessen competition or compromise the privacy of people who use the search engines.

Google tried to stop Yahoo from falling into Microsoft's camp. Last year it formed its own proposed search advertising deal with Yahoo, only to be forced to retreat after U.S. antitrust officials threatened to sue.

Microsoft helped spearhead the campaign against a Google-Yahoo partnership. Now many people, including Ballmer, expect Google to try to turn the tables on Microsoft by opposing its Yahoo deal.

"There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users," Google spokesman Adam Kovacevich said. "We're interested to learn more about the deal."

Advertisers will probably support Microsoft because a stronger player in the search market should protect them from potential abuses by Google, said Kevin Lee, CEO of online marketing specialist Didit Inc.

"If there's only one choice in search, that's just an uncomfortable position to be in," Lee said.

Like Yahoo, Microsoft has invested billions in search technology during the past decade. Yet it remained a distant third in market share while its online losses piled up. Microsoft is counting on Bing, unveiled last month, to turn things around.

Bing has been getting mostly positive reviews and picking up slightly more traffic with the help of a $100 million marketing campaign. Analysts believe the successful debut pushed Microsoft to reopen negotiations so it could expose its search engine improvements to a wider audience.

While Microsoft and Yahoo await government approval of their partnership, there is no doubt Google will try to increase its lead by upgrading its own search engine, said Danny Sullivan, editor of the online newsletter SearchEngineLand?.

Already, Google is going after Microsoft's bread-and-butter business of software for personal computers. It's working on a free operating system for inexpensive PCs, a move that could threaten Microsoft's Windows.

"Google is very paranoid about Microsoft," Sullivan said. "They are always trying to figure out what kind of `evil' thing Microsoft is going to do next."

• Jessica Mintz reported from Seattle. AP Business Writer Christopher S. Rugaber contributed to this report from Washington.
• 2009 The Associated Press

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Microsoft-Yahoo: A Rival for Google? †

• News July 29, 2009, 9:08PM EST
• By Peter Burrows

The deal, if approved by antitrust regulators, could give the Internet search giant a viable competitor. Advertisers are optimistic

So Microsoft (MSFT) got its wish. Thanks to a long-awaited deal with Yahoo! (YHOO), the software giant is poised to become the clear No. 2 in the most lucrative Internet market of them all: search. Under the agreement, Yahoo will use Microsoft technology to respond to searches made on Yahoo sites and to serve up the ads that appear alongside the results. If the deal is cleared by antitrust regulators, which is no sure thing, Microsoft will triple its search market share to nearly 30% and become the only meaningful alternative to Google, which holds 65% of the market.

The deal casts Microsoft in an unfamiliar role. The software maker that drew fire for years for its allegedly anticompetitive behavior now must prove itself an effective force for competition against Google (GOOG). Advertisers and online publishers want a viable alternative to the search titan. But analysts question whether Microsoft can avoid losing ground as it implements the complex Yahoo partnership, which could take two years, and afterward come up with real innovations in the business. "We can't afford a hiccup on this," Microsoft CEO Steve Ballmer said in an interview.

There is cause for optimism. Microsoft's Bing, the search engine it launched two months ago, is a hit, having begun to gain market share. And by combining Bing's search with Yahoo's, Microsoft will get more data about Web surfers' behavior to refine its technology. A Much Larger Audience

Just as important as answering Web surfers' queries is delivering the ads that appear next to them. That, after all, is where Microsoft will make its money. Although the company's adCenter technology works reasonably well, many advertisers haven't bothered to use it, because it couldn't deliver as many eyeballs as Google could. Since all ads on Yahoo sites now will run though adCenter, advertisers using the system will be able to reach a much larger audience than in the past. "If you're an advertiser, you're going to be able to triple your reach overnight," says Robert Murray, chief executive of digital ad agency iProspect.

Advertisers are willing to give Microsoft a chance. Some complain Google's dominance has led to a lack of innovation and excessive costs for advertisers. "We think a formidable competitor is going to put some pressure on Google's model," says Chris Paradysz, CEO of ad agency PM Digital.

Ballmer negotiated tough terms with Yahoo. While analysts had expected he would have to spend 48 billion for all of Yahoo.

Microsoft has long struggled against Google. Now Ballmer is gaining substantial ground in his pursuit. "Microsoft doesn't necessarily get it right the first time," says Yahoo CEO Carol Bartz. "But by God, you can't beat 'em on persistence."

Burrows is a senior writer for BusinessWeek?, based in Silicon Valley.

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Microsoft-Yahoo: whither the boatloads? †

• 20:46 July 29th, 2009
• Posted by: Eddie Chan

It takes a deft touch to vanish a boatload of cash, but Yahoo seems to have done it.

Disappointed investors voted with their feet initially when the Microsoft-Yahoo deal, announced in the early hours of Wednesday, came with reams of detail on search, revenue-sharing, technology and advertising tie-ups - but no anticipated upfront payment, which some had put at around $1 billion. Yahoo prompty lost about a 10th of its market value.

"This agreement comes with boatloads of value for Yahoo, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development," Yahoo Chief Executive Carol Bartz said in a press statement released jointly with Microsoft on Wednesday.

Back in May, Bartz said her company would be open to any deal with "boatloads of money" and the right technology. Microsoft is indeed cash-rich, but the market might be wondering why shareholders won't immediately see much from its coffers.

Asked what had happened to the boatloads of money on a conference call for investors and media, Bartz appeared to go on the defensive.

"What was really important to Yahoo is that we had a deal that flowed successfully through our P&L. Having a big cash payment upfront doesn't really help us from an operating standpoint," Bartz responded, before launching into an explanation of traffic acquisition costs, expense lines and investing in the business.

"So listen, it's easier to talk about boatloads of cash and value because you guys understand that. But as far as we're concerned the boatload of cash is us preserving our revenue line."

• Reuters Blogs

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A Case for Buying Yahoo Shares After the Microsoft Deal †

• July 29, 2009, 3:00 PM ET
• WSJ Blog

"We believe Microsoft's proposal substantially undervalues Yahoo."-former Yahoo CEO Jerry Yang, in a letter to employees on Feb. 11, 2008 about Microsoft's $41.6 billion unsolicited bid for Yahoo.

Yahoo will sell its search capabilities to Microsoft, "if there's boatloads of money and the right technology involved."-Carol Bartz, Yahoo chief executive, in an interview at the All Things Digital Conference on May 27.

"As far as we're concerned, the boatload of cash is preserving our revenue…Having an upfront payment didn't really help us from an operating standpoint."-Bartz, in a conference call with analysts, announcing the deal on Wednesday.

yahoochartLet us be clear: Yahoo has squandered many chances to generate huge value for its shareholders in its three-year dance with Microsoft. First and foremost, it turned down Microsoft's bid to buy the entire company for 24 billion.

But the past is the past. Looking ahead, there may be a good case for buying Yahoo now that it has outsourced much of its search business to Microsoft. It isn't a blockbuster deal, but the move makes strategic sense for Yahoo.

Here is the play: Yahoo's shares are taking a beating today, falling 11%, or 15.30 in midday trading. Investors are unhappy that the search deal didn't include any "boatloads of cash" from Microsoft. Analysts had been expecting at least $1 billion. Investors also may be selling on the news that the on-again, off-again negotiations between the two companies are finally over.

The bears aren't buying that the search deal will create value for Yahoo over the long term. But the bull case is worth considering. The deal enables Yahoo to tap into Microsoft's Bing search technology, which has been rolled out with some success in recent months. Yahoo also will also retain 88% of its search revenue, an increase from the 85% share that Microsoft offered when it first proposed a search deal last summer. Under that proposal, Yahoo's take went down to 70% after three years.

For Yahoo, this adds up to 1 a share more of enterprise value, says Christa Quarles, of Thomas Weisel Partners, referring to a measure of the total value of a business, with debt and cash factored in. Yahoo's 2008 Ebitda was $1.8 billion.

If you add in the roughly 2 a share, Quarles says. According to Yahoo Finance, Yahoo has an enterprise value of $20.56 billion.

Quarles has a "hold" rating on Yahoo, but she admits that today's sell-off makes the stock look attractive. "People have gotten emotional around the selling and any time that happens, there can be buying opportunity around that," she said.

To be sure, there are a lot of pitfalls to the search deal and few guarantees for Yahoo. Unlike a similar Google-AOL search deal that gave AOL guarantees on revenue, Yahoo is entitled to only 18 months of pricing guarantees in its 10-year deal with Microsoft. After that, Yahoo will be at the mercy of Microsoft's technology to maximize search pricing, says Mark May, an analyst at Needham & Co.

It is worth noting that Google invested 283 million. Microsoft avoids such a risk in its deal with Yahoo.

The bears may be too angry about Yahoo's long history of lost opportunity to focus on the positives of the search deal. "But I think Yahoo gets to have its cake and eat it too," says Sandeep Aggarwal, an analyst at Collins Stewart. "Wall Street may have been expected too much, but Yahoo is a net gainer here."

• Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

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Microsoft, Yahoo Tout Ad Alliance †

• JULY 30, 2009
• By SUZANNE VRANICA and EMILY STEEL

Partners Court Madison Avenue, Promising More Competition for Google

In recent weeks, Microsoft has been touting its hoped-for Web-search partnership with Yahoo as a boon to advertisers, trying to drum up support for the alliance on Madison Avenue and damp antitrust concerns in Washington. [The microsoft.com, yahoo.com, and google.com web pages are displayed on a computer screen in New York, U.S., on July 29, 2009. Microsoft Corp. and Yahoo! Inc. agreed to collaborate on Internet search and online advertising, creating a united front to challenge Google Inc. Source: Bloomberg] Bloomberg

The microsoft.com, yahoo.com, and google.com web pages

The two Internet companies have been selling the partnership, which was announced Wednesday, as a broadening of choices, providing a challenger to Google's dominance of search advertising.

Google captured about 70% of the $10.5 billion spent in the U.S. last year on search ads -- those that appear alongside Internet-search results.

"We have been laying the groundwork with big advertisers, asking, 'If we build it, will you come?' " says Michael Kassan, a longtime ad and media executive who now consults for Microsoft. Mr. Kassan says he has been meeting with advertisers, ad executives and industry trade groups.

On Madison Avenue, at least, it hasn't been a hard sell. "Competition is good, and the more there is, the better it is for our clients," says John Wren, chief executive officer of Omnicom Group. Rob Norman, CEO of GroupM Interaction Worldwide, the digital-media unit of advertising conglomerate WPP, says, "There wasn't much lobbing necessary."

In June, Yahoo Chief Executive Carol Bartz met with David Kenny, managing partner of VivaKi?, a digital ad and media firm owned by Publicis Groupe, and discussed how a possible deal could add value to Mr. Kenny's clients. "I didn't feel they were lobbying, but felt they were generally asking my opinion," Mr. Kenny says.

Under the partnership deal, Microsoft's technology will power Yahoo's search engine, while Yahoo will sell ads on behalf of both companies.

Shortly after the deal was announced, the two companies went on a full-court press, sending out separate letters to major ad agencies and advertisers. One was entitled "Benefits to Consumers, Customers and the Internet." Yahoo also approached big search advertisers, such as online brokerage Scottrade and travel Web site Travelocity.com.

Microsoft CEO Steve Ballmer and Ms. Bartz spent part of Wednesday morning calling advertising heavyweights like Publicis CEO Maurice Levy and WPP chief Martin Sorrell, according to people familiar with the matter. It's an important constituency; WPP alone spends roughly $850 million of its client's ad dollars with Google annually.

Meanwhile, major marketers like Unilever, Best Buy, Travelocity, InterContinental? Hotels Group and Scottrade, say they welcome the Microsoft-Yahoo alliance, not just for competitive reasons, but because they think it will eventually streamline the way they buy search ads. "Today, we manage an account with Microsoft, and we manage an account with Yahoo. I love the efficiency that it will be consolidated in one platform instead of two," says Victoria Treyger, Travelocity's chief marketing officer.

When larger advertisers buy search ads on the Web, they generally look at the proportion of consumers who use each of the handful of Internet search engines, and place bids accordingly. Google gets about 70% of the search-ad money spent by a typical marketer, with the rest spread among Yahoo, Microsoft and other players. Marketers then adjust their spending among the search engines according to how each performs. Microsoft and Yahoo are out to change that equation. [Great Expectations]

But not everyone believes the partnership will be an easy sell. "It will be tough, because Google has become a de facto standard from a search perspective," says Jeff Hayzlett, chief marketing officer of Eastman Kodak. "When your brand name becomes a verb [for search]," he says, referring to Google, "it can be game over for the rest of the pack. Changing people's behavior is the hardest thing any company can do."

But some advertisers say they are concerned about the potential for glitches as Yahoo commits its search-ad salespeople to Microsoft's technology.

Under the deal, Yahoo will get a significant portion of the revenue from the search ads it sells on Yahoo sites. It won't get paid for the ads it sells on Microsoft sites. That revenue will go entirely to Microsoft.

Advertisers also will be able to buy the search ads on both companies' sites directly through a self-service system created by Microsoft. If cleared by regulatory authorities, the arrangement is expected to take about two years to fully implement.

"We want to make sure it is a simplified process, and that's the challenge," says Rob Master, Unilever's director of media for North America.

In an interview Wednesday, Yahoo's Ms. Bartz said the deal will make it easier for advertisers by creating one search sales force for them to deal with. She added that she is confident Yahoo can hold on to their business in the waiting period as the deal undergoes regulatory scrutiny. "The advertisers aren't going to go away," she said.

• Write to Suzanne Vranica at suzanne.vranica@wsj.com and Emily Steel at emily.steel@wsj.com

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For Bartz, Some Potential Pitfalls Arise †

• JULY 30, 2009
• By JESSICA E. VASCELLARO

Web-Search Pact Frees Up Resources, but Yahoo CEO Faces Integration Risks; Yahoo Shares Plunge 12%

Yahoo Inc. confirmed it will replace its search and search-advertising technology with offerings from Microsoft Corp., a long-awaited deal that could help the companies more effectively compete with Google Inc.

But the partnership -- under which Yahoo will stop investing in two widely used technologies that it helped pioneer -- received a chilly reception from Yahoo investors and adds to the management challenges facing Yahoo Chief Executive Carol Bartz.

Among the difficult tasks Ms. Bartz will face: selling the deal to shareholders, further trimming Yahoo's work force, training Yahoo ad-sales staff on Microsoft technology and maintaining morale through what is likely to be lengthy scrutiny in Washington.

Ms. Bartz argued the deal will free up resources for Yahoo to compete aggressively in other areas, including its online-media properties like Yahoo News, new mobile services and its display-advertising business.

"Our strategy as a company is growing audience and enhancing our display-ad leadership," Ms. Bartz said in an interview. "That is what really makes sense."

But Ms. Bartz, who once suggested that any deal with Microsoft would come with "boatloads" of cash, disappointed some investors by failing to secure a big upfront payment.

She estimated that payments from Microsoft would boost Yahoo's operating income by about 200 million a year on servers and other capital equipment.

Ms. Bartz argued Wednesday that such recurring benefits create "boatloads of value" that outweigh a one-time payment. Still, Yahoo's shares declined 12% Wednesday to $15.14 at 4 p.m. on the Nasdaq Stock Market.

The 111-page agreement with Microsoft, slated to last 10 years, came together over the course of many months and has consumed Ms. Bartz since she became CEO in January. Key provisions include Yahoo replacing its search-engine technology with Microsoft's Bing.

Yahoo will retain ad-sales operations. Its representatives will sell search ads to large advertisers for both Yahoo and Microsoft, taking calls from marketers like Target Corp. and Verizon Communications Inc. and helping them manage what keywords they buy. But they will use Microsoft technology to do so.

Microsoft agreed to give 88% of the search-related revenue generated on Yahoo sites back to Yahoo, but will keep all the revenue from Microsoft's own sites. Yahoo's split could increase modestly after five years, if Microsoft decides to broker some premium search sales itself at that time.

For Microsoft, the deal reflects a belief by Chief Executive Steve Ballmer that Internet search is critical to Microsoft's future. The bonanza from search advertising has subsidized Google's foray into operating systems and online applications, which could threaten Microsoft's core businesses.

Ms. Bartz, meanwhile, confronts a thicket of operational concerns. For example, some Yahoo employees will be asked to transfer to Microsoft, and some are expected to be laid off. Another issue is uncertainty about when and whether the deal will pass regulatory review; the companies said they hope to close it in early 2010.

Once approved, Yahoo said it will take about two years to fully implement the deal, a period during which some observers worry the companies may lose ground to Google. "There is a big fear that, by virtue of distraction, share will be lost," said Christa Quarles, an analyst with Thomas Weisel Partners.

Ms. Quarles said Ms. Bartz has work to do to repair her trust with investors, because of the failure to deliver a big upfront payment.

"The questions now are how does Yahoo look from a fundamentals basis and can people trust Carol," she said.

In a joint interview, Ms. Bartz and Mr. Ballmer said the deal was the best way to help Yahoo over the long term, giving it a continued stream of cash. They rejected the possibility of Microsoft buying Yahoo.

Ms. Bartz expressed confidence that Yahoo could handle the transition smoothly. She said the company had already begun talking to advertisers to explain that their relationship with Yahoo would stay in tact.

Internally, the company will begin reaching out to employees "team by team" and try to retain key employees with retention bonuses. ―Joann S. Lublin and Nick Wingfield contributed to this article.

• Write to Jessica E. Vascellaro at jessica.vascellaro@wsj.com

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Yahoo's Bartz Has Missed the Boat †

• JULY 30, 2009
• By THOROLD BARKER

So much for the "boatload of money" Carol Bartz wanted from Microsoft in return for a search deal. Instead, Yahoo's chief executive settled for a deal that wouldn't fill a bathtub. The transaction involves no cash upfront and gives Microsoft what it has always wanted: effective control over Yahoo's search business.

Given Microsoft was willing to pay nearly $48 billion for all of Yahoo in early 2008, this is quite a coup for the software giant. It can now take another crack at Google's dominance of the lucrative search market, having largely failed with its expensive in-house attempts. Google has 65% of search queries in the U.S. and 68.6% globally, according to ComScore?. Yahoo's market share is 19.6% and 9%. Microsoft trails at 8.4% and 2.7%.

Yahoo's search bar will be powered by Microsoft's new Bing engine, and ads will be served against search results by the latter's advertising platform. That will finally give Microsoft the volume of search queries it needs to try narrowing the gap with Google by making its ad business more efficient.

So much for Microsoft. What does Yahoo get?

Surprisingly little. It will receive an attractive 88% of the search revenue generated from traffic through its own sites, but that is still less than the 100% it used to get. And the revenue-share deal lasts 10 years, with certain changes kicking in halfway. After that, Yahoo might have a weaker hand to renegotiate.

Yahoo, in giving up on its own technology, will help reduce capital expenditure by about 275 million a year.

The transaction will probably get through regulatory scrutiny even though it will leave only two main competitors in most markets, because it would create a more serious challenger to Google. But the deal faces many months of scrutiny -- given the Department of Justice is getting tougher and Microsoft has faced years of regulatory issues in Europe. That, and the integration risk that will come afterward, gives Google plenty of opportunity to extend its market leadership in the meantime.

But the real disappointment for Yahoo shareholders is that the company threw away its trump card so cheaply. Microsoft needed Yahoo's search business for its longer-term strategic goal of competing with Google on the Internet. That should have allowed Yahoo to force a premium price. Instead, it squandered last year's approach.

It is now hard to see a sale of the reshaped Yahoo for a good price, leaving the company to slog it out in the increasingly competitive display-advertising market. Small wonder Yahoo investors lost a boatload of money Wednesday, as shares crashed 12%.

• Write to Thorold Barker at thorold.barker@wsj.com

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Antitrust Scrutiny Will Grow †

• JULY 30, 2009
• By AMY SCHATZ and FAWN JOHNSON

WASHINGTON -- Microsoft Corp.'s proposed Internet search and advertising pact with Yahoo Inc. will likely face considerable scrutiny by federal antitrust regulators and lawmakers.

A few hours after the deal was announced, Sen. Herb Kohl (D., Wis.), chairman of the Senate Judiciary Antitrust Committee, said it warrants "careful scrutiny" since it would combine "industry giants and direct competitors in Internet advertising and search markets." He promised the deal would be "closely reviewed" by his committee.

A Federal Trade Commission spokesman declined to comment. A Justice Department spokeswoman said the agency is "aware of" the deal but declined to comment further.

Consumer groups weren't as reticent, saying the deal could lead to less choice for consumers and more tracking of their online activities.

"There are questions that must be answered regarding the collection and sharing of consumer data by the two companies," said Jeff Chester, founder of the Center for Digital Democracy, a Washington nonprofit focused on privacy issues.

The agreement also could receive attention overseas. The European Union has fairly broad powers to examine deals that involve potentially restrictive business agreements, and it also reviews mergers and joint ventures.

A spokeswoman for the European Commission, the EU's executive arm, said the regulator hadn't been "informed about the details of the transaction." She declined to comment further, beyond saying that the commission "keeps this sector, as others, under review."

Regulatory approval of the deal isn't a sure thing, as Google Inc. discovered last year when the Justice Department scuttled its proposed advertising deal with Yahoo over concerns that it would significantly decrease competition for search advertising.

The companies are confident that the deal will be approved, Yahoo General Counsel Michael Callahan and Microsoft General Counsel Brad Smith said in a joint interview. They argued that the deal shouldn't be seen as reducing the number of players in Internet search from three to two but rather as helping both companies better compete in online advertising with Google.

Although the deal narrows the gap with Google, Microsoft and Yahoo combined accounted for less than half of Google's 65% share of searches in the U.S. market in June, according to research firm Comscore.

The combination is "really the only way to ensure" that there is "going to be a competitive long-term alternative to Google in paid search," Mr. Callahan said. Mr. Smith noted that the companies will continue to compete in areas where they each have significant shares of the market, such as email and instant-messaging.

It isn't clear whether Google will raise any serious objections to the deal. Microsoft lobbyists and lawyers worked diligently last year to kill Google's advertising deal with Yahoo.

"There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users," Google spokesman Adam Kovacevich said in a statement. "We're interested to learn more about the deal." ―Jessica E. Vascellaro contributed to this article.

• Write to Amy Schatz at Amy.Schatz@wsj.com and Fawn Johnson at fawn.johnson@dowjones.com

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Microsoft, Yahoo now free to focus on new selves †

• July 29, 2009 1:22 PM PDT
• by Stephen Shankland

Investors panned Yahoo's search and advertising deal with Microsoft on Wednesday, sending Yahoo's stock down 12 percent. IDC's analysts called it a "strategic mistake."

But here's what's good about it: After a year and a half of public scrapping, behind-the-scenes drama, and dysfunctional communications through leaks to the press, Microsoft and Yahoo now can get back to business.

The Microhoo concept has been reduced from a giant cloud of uncertainty hanging over both companies to merely a complicated partnership between two rivals with Google as a common foe. The range of possibilities for Microsoft and Yahoo, which ran all the way from nothing to Yahoo disappearing altogether, has been pruned back to a much more manageable scope.

Nobody will notice any difference immediately from the outside. First comes regulatory scrutiny, with the companies hoping for approval in early 2010. But already, the deal provides a framework that should make it easier for the companies to establish their new identities.

With Microsoft acquiring license to Yahoo's search technology, applying its search-ad auction process to both companies' searches, and offering jobs to many Yahoo employees, it appears Redmond is carrying more of the Ph.D.-intensive fight to Google. Yahoo, keeping its display advertising business and focusing on its home page redesign, becomes more of a hub for people's online activity and platform for outside Web sites' developers.

Some awkwardness remains where those two visions overlap. One is the work Yahoo has done to augment search results through a program called SearchMonkey?, which can interpret tags on others' Web sites so they can be spruced up with new information when those pages appear in search results. To work, it requires the cooperation of the Web crawlers that index the contents of Web pages and the servers that present the search results.

To me, that looks like the sort of chore that will require Microsoft and Yahoo to work together in search. Fortunately, Microsoft and Yahoo have a 100-page playbook that had better address such aspects, and Microsoft Senior Vice President Yusuf Mehdi declared Wednesday he likes the SearchMonkey? approach.

The companies also gave themselves two full years to fully implement the deal, too, so there's time to work out such details. In the meantime, Yahoo can't afford to stand still. SearchMonkey? is one element of a new hybrid search page that Yahoo said it will start testing with its users starting in August.

There's some important context for these changes and for the Microsoft-Yahoo deal: search results are growing beyond the plain list of 10 hyperlinks with accompanying snippets of text. Google, for example, blends in ever larger quantities of "universal" search results such as maps, YouTube? videos, photos, and news. Yahoo plans to make its search pages more like its main page.

Yahoo plans to make its search pages more like its main page.

Yahoo's new search results page include not only SearchMonkey?, but also display advertising and the key element of its new home page, a customizable list of applications down the left side. The search results themselves become just part of a broader package, so Yahoo outsourcing the actual search engine duties to Microsoft isn't giving away as much of the core business.

Outsourcing search has a cost, of course. The partnership means Yahoo will get only 88 percent of search-ad revenue on its sites for the first five years, down from 100 percent today. Yahoo, though, also gets lower operational expenses and thus, it expects, greater profitability over the long term. Yahoo expects $275 million more each year in operating cash flow.

Carol Bartz, Yahoo's new chief executive, has shown herself to be a pragmatist who prefers picking her battles. With the Microsoft deal, she's chosen to sit a big one out, freeing the company from having to out-Google Google. What the company sacrifices in ambition it gets back in goals that are actually attainable.

For Microsoft, though, the struggle against Google becomes more intense. The combined search market share of Yahoo and Microsoft still is half what Google has, and the fact that Wednesday's Yahoo pact is smaller in scope than some earlier possible incarnations means Microsoft has that much more hard work before it.

The company clearly wants to make a third big business out of its online operations to complement its Windows and Office cash cows. Getting Yahoo's search technology and Web site traffic gives it a better stronghold but by no means a victory.

Stephen Shankland writes about a wide range of technology and products, but has a particular focus on browsers and digital photography. He joined CNET News in 1998 and since then also has covered Google, Yahoo, servers, supercomputing, Linux and open-source software, and science. E-mail Stephen, or follow him on Twitter at http://www.twitter.com/stshank.

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Microsoft open to &verb(SearchMonkey), other Yahoo tech &aname(z9cd39c9,super,full){†};

• July 29, 2009 9:51 AM PDT
• by Ina Fried

Microsoft's search deal with Yahoo is the culmination of months of well documented negotiations, but in many ways, it is just the beginning of the long road ahead.

In the coming months, Microsoft and Yahoo will not only have to win regulatory approval for the deal, but also figure out how to bring together disparate approaches to the search market.

Microsoft has spent much of its energy in the last couple years refining its core technology, improving in vertical categories, and rebranding its Web search under the Bing moniker. Yahoo, meanwhile has put a lot of energy into tools that allow others to build on its technology, including the BOSS (Build your Own Search Service) and SearchMonkey? efforts.

As part of the deal announced on Wednesday, Microsoft will now be responsible for trying to merge those efforts. In an interview, Microsoft Senior Vice president Yusuf Mehdi said Microsoft hasn't looked at the specific lines of code in that area, but is open to trying to take Yahoo's best ideas and integrate them into Bing.

"We like the approach that Yahoo has done," he said, referring to SearchMonkey? and BOSS.

Both Mehdi and Yahoo Executive VP Schneider acknowledged that there are integration challenges, but Schneider said there is a clear delineation of who is responsible for what.

"At the same time we are integrating, we are really divide-and-conquering," Schneider said in the joint interview with Mehdi. "The reality is in the way we structured (the deal), it allows each of us to innovate in the areas that will jointly bring advantage."

The fact that the companies have already spent time thinking about these issues reflects the different nature of the discussions this time around.

Whereas last year's negotiations were done with Yahoo's board and a keen eye on Wall Street, the deal announced on Wednesday is much more focused on how to build a search business for the long term.

CEO Steve Ballmer noted on the conference call earlier Wednesday that the two sides have a 100-page playbook as opposed to a two-page term sheet and also noted that the negotiations were handled by management as opposed to representatives of the company's boards.

In addition to being run by the top management from Microsoft's online group, including Mehdi, Senior Vice President Satya Nadella, and online unit President Qi Lu (a former Yahoo executive), Mehdi and Schneider said the negotiating teams routinely called on the companies' engineering and sales ranks to make sure the deal they were structuring made operational sense.

It wasn't just the typical few business development executives in a room hashing out financial details, the pair said. "We really have got a great vibe with Yahoo's operating team," Mehdi said.

The two companies will be able to do some work on their joint plans while the deal is pending, but there are limits as to how much collaboration can take place.

"We will do all of the pre-work that we are allowed to do in terms of preparing," Mehdi said. "We feel like we can make a lot of progress."

Ultimately, though, the two companies said they expect just integrating Bing's results into Yahoo in the U.S. will take several months, while moving from Yahoo's Panama ad-serving technology to Microsoft's AdCenter? could take a year. It could be two years from the deal close before the two companies can fully implement the deal across the globe.

Microsoft's Mehdi didn't close the door on an eventual expansion of the deal into some of the areas the two companies had at one point considered, such as joint work on display advertising.

"Today is a start on a fantastic partnership which we are very excited about," Mehdi said. "By starting this partnership it allows us to over time build greater and deeper relationships. Right now the focus is on getting to a credible No. 2 player in search and paid search."

One of the open questions is what will happen to each company's business and workforce during the time that the deal is pending. Schneider said the companies have a communications plan for employees as well as the sorts of retention bonuses planned to keep key employees in place.

"We believe this is a winning plan," she said. "People want to be part of a winning vision."

Ultimately, Yahoo CEO Carol Bartz said some of Yahoo search employees will move to other parts of the company, some will be offered jobs at Microsoft, while others will eventually lose their jobs.

For his part, Mehdi said the company will continue to beef up its search staff while the deal is pending. "We are continuing to hire and invest in search."

During her years at CNET News, Ina Fried has changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley. These days, most of her attention is focused on Microsoft. E-mail Ina.