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After long-drawn speculations, Yahoo! and Microsoft have come together to forge a formidable alliance in Internet search and advertising space that will challenge the dominance of market leader Google.
The ten-year agreement would see both the companies coming together in the search arena and sales activities related to search advertising.
"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," the two firms said in a statement.
As part of the deal, Microsoft would acquire an exclusive ten-year licence to Yahoo!'s core search technologies.
This would also allow the software giant to integrate Yahoo!'s search technologies into its existing platforms including Bing, Microsoft's newly launched search engine.
Yahoo! would be compensated by Microsoft through a revenue sharing agreement on traffic generated on Yahoo!'s network of both owned and operated and affiliate sites.
"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," the statement noted.
Google has more than 60 per cent share in the search market.
Since early 2008, Microsoft had been pursuing an alliance with Yahoo! and even came up with over USD 44 billion takeover plan, which did not materialise.
Microsoft Chief Executive Officer Steve Ballmer said the agreement would provide Microsoft's search engine, Bing, the scale necessary to more effectively compete, attracting more users and advertisers.
Asserting that the partnership would provide a "viable alternative to advertisers," the statement said they would no longer have to rely on one company that dominates more than 70 per cent of all search.
Once the agreement is fully implemented, Yahoo! Expects that it would provide a benefit to annual GAAP operating income of about USD 500 million and capital expenditure savings of about USD 200 million.
Yahoo! anticipates that the pact would also result in a benefit to annual operating cash flow of nearly USD 275 million.
"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 Yahoo! Chairman Roy Bostock said.
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