After years of discussion and speculation around a business deal between Microsoft and Yahoo!, an agreement has been reached that strengthens both companies and creates heightened competition against Google. In the deal, Microsoft’s new search engine, Bing, will power Yahoo! search on all of Yahoo!’s sites, while Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers.

Other key highlights of the agreement:

– The deal will become official in 2010, pending regulatory approval, with a term of agreement for 10 years. Full implementation is expected within 24 months following approval.

– Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network.

– The agreement impacts each company’s search business only. The companies will continue to compete in other areas and maintain their own separate display advertising business and sales force, as well as individual web properties, products, email, instant messaging and other aspects of their business.

The companies have set up an informational website with more details about the agreement at: www.choicevalueinnovation.com.

Our Thoughts

As the search marketing strategist for many of the world’s largest advertisers, GroupM Search and its brands welcome this deal and the value it brings to our clients. We’ve always said that competition, scale and innovation are important to large advertisers in any market. Microsoft is back on the map with their innovation and technology developments which have catapulted Bing into a compelling alternative with improved consumer experience and advertiser opportunities. That technology, coupled with the audience and service Yahoo! brings, has the potential to deliver a more relevant search platform with better efficiencies and opportunities for advertisers, as well as increased volume in search queries.

“We like what we’ve seen with the enhancements behind Bing, and know that Yahoo has a terrific structure for agency service within their sales force. If focus continues on development in these areas, then the industry can expect a more competitive marketplace than ever before,” said Chris Copeland, CEO, GroupM Search – The Americas.

“A 30 percent market share is a giant step forward, and Microsoft is the better positioned company between the two against Google to develop technology. The success of the agreement and growth for the companies will lie in the innovation Microsoft is hinting to with Bing and how that will come to life.”

While we are optimistic about the impact of the combined scale created by this deal, we have open questions around the agreement and its impact.

Search and Behavioral Retargeting – We are interested in learning more about the executional impact around the evolving search and behavioral targeting disciplines.

Innovation – As of now, Yahoo!’s reps have told us that all existing products will remain in place, which is important to our clients. We wait to see how highly-successful programs, such as Yahoo!’s Paid Inclusion or the more recent Microsoft Cashback program, will function in the future.

Data Usage and Ownership - Currently, the deal protects consumer privacy by limiting data shared between the companies and restricts the sharing of search data between the companies. It promises greater transparency to both the advertiser and consumer, yet the details remain unknown.

Maintaining a Bridge Between Sales and Technology – Yahoo!’s sales force, who has a strong foundation for supporting agency business, will now sell what was formally a Microsoft only product.  Apart from wondering what will become of the AdCenter sales force come January, we are curious to see what the plan is for the interplay between technology and operations at Microsoft with Yahoo!’s sales force, as the potential for accountability between the two and market pressures will be heightened.

Impact of the Loss of a 3rd Player – And then there were two, so to speak. With the loss of a third major player in the space, the dynamics we’ve witnessed over the past decade could greatly shift. Specific to pricing, we expect more advertisers into the pool with this new agreement, and expect some pricing pressure to exist as these companies figure out the less-used AdCenter program. We’ll be keeping an keen eye on how the new partnership impacts the direction of the engines, competition, behavior and trends in the space.

What the deal means for advertisers

It’s always important when planning a search program to allocate share in a manner that is best aligned with an advertiser’s strategy, whether it’s among the Big 3 or secondary engines. Ultimately, the search deal between Microsoft and Yahoo! opens the door to compelling competition in the marketplace, which to date has been unrivaled. The scale and opportunity for innovation that emerge from this deal will attract more users and provide advertisers with improved alternatives for leveraging their presence. Advertisers will also reach a bigger audience with increased relevancy and broader keywords. As such, the opportunity exists for companies take advantage of the new structure and explore greater mid- and long-tail strategies, which is good for both the advertiser and the engines’ value in delivering relevant, meaningful results to consumers.

Overall, we feel the search agreement between Microsoft and Yahoo! is good for advertisers and for the industry, so long as they continue to emphasize and develop in areas of innovation and service. We will continue to monitor the unknowns and share insights as they develop.