Microsoft and Yahoo's Search Deal Gets Green Light

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Yahoo and Microsoft’s long-pending search deal has cleared almost all regulatory hurdles, and for the second- and third-place players in search, it’s now time to get down to implementation.

Under terms of the ten-year, exclusive agreement, Microsoft (NASDAQ: MSFT) will provide its Bing search infrastructure to Yahoo (NASDAQ: YHOO) sites in return for a portion of the advertising revenues.

Yahoo and Microsoft initially announced their groundbreaking search deal late last July in a bid to better compete against search giant Google (NASDAQ: GOOG). Though the two officially signed-off on the search agreement in early December, it’s only now that regulatory officials in both the U.S. and the European Commission (EC) have agreed to the deal. As a result, the road is now clear for Yahoo and Microsoft to begin putting the deal into practice.

“Implementation of the deal is expected to begin in the coming days and will involve transitioning Yahoo!’s algorithmic and paid search platforms to Microsoft, with Yahoo becoming the exclusive relationship sales force for both companies’ premium search advertisers globally,” said a joint statement from the two companies.

Regulatory approval of the deal went much more smoothly than Microsoft’s long-running feud with the EC — the European Union’s (EU) executive branch — regarding claims that the software titan illegally abused its dominant position of Windows on the desktop to leverage adjacent markets such as Web browsers. Microsoft and the EC amicably settledthat case in mid-December.

“The European Commission has today approved the proposed acquisition of the Internet search and search advertising businesses of Yahoo … by Microsoft under the EU Merger Regulations. The Commission concluded that the merger would not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it,” said a statement issued by the EC’s competition directorate on Thursday.

Microsoft’s CEO Steve Ballmer cheered Thursday’s milestone.

“Although we are just at the beginning of this process, we have reached an exciting milestone,” Ballmer said in the two companies’ statement. “I believe that together, Microsoft and Yahoo will promote more choice, better value and greater innovation to our customers as well as to advertisers and publishers.”

Ballmer had fruitlessly pursued Yahoo throughout the first half of 2008 with the intent to buy the whole company for some $44.6 billion. However, Yahoo’s CEO at the time, co-founder Jerry Yang, vehemently rejected Microsoft’s multiple attemptsto forge any kind of deal.

Following a changing of the guard that resulted in Yang’s replacement as CEO by former AutoDesk CEO Carol Bartz, the two signed a preliminary deal, pending regulatory approval, last July.

In the roughly six months since Ballmer and Bartz announced their collaboration, Microsoft’s Bing search technology has grown steadily though slowly in market share while Yahoo’s has slipped.

In January, Bing held 11.3 percent of all U.S. searches, up from 10.7 the month before — its eighth consecutive gain. Meanwhile, Yahoo held 17 percent — its 12th consecutive month of share loss.

Together, the two partners’ search engine market share sits at 28.3 percent — still far smaller than Google’s at 65.4 percent, but far stronger than Bing alone, prior to implementation of the deal. That had an impact on the EC signing off on the agreement.

“The Commission’s first-phase market investigation has shown that not only market participants do not expect the transaction to have any negative effects on competition or on their business but they also expect it to increase competition in Internet search and search advertising by allowing Microsoft to become a stronger competitor to Google,” the EC’s statement said.

Although some observers have said that the deal constitutes the dismantling of Yahoo search, Microsoft and Yahoo executives disagree.

“Yahoo will focus on providing a compelling and innovative search experience that allows people to find and explore the things, people and sites that matter most to them. While Microsoft will provide the underlying platform, both companies will continue to create different, compelling and evolving experiences, competing for audience, engagement and clicks,” the two companies’ statement said.

Microsoft and Yahoo hope to make the initial transition to use Microsoft’s algorithms by the end of the year, according to the two companies’ statement. The companies would also like to transition U.S. advertisers and publishers to the new model in time for the 2010 holiday season, but may have to delay that until 2011, they said.

The plan is to have the entire transition accomplished globally by early 2012.

Finally, although the major hurdles have been crossed, not all of the regulatory approvals are finalized yet.

“Microsoft and Yahoo! continue to work with regulators in Korea, Taiwan, and Japan to ensure that they have all relevant information necessary to evaluate the transaction before the deal commences in those specific jurisdictions,” the companies’ statement said.

Stuart J. Johnston is a contributing writer at InternetNews.com, the news service of Internet.com, the network for technology professionals.