Yahoo announced a nonexclusive partnership Thursday under which Google will supply some search ads to its rival, a move that could increase money generated from Yahoo's search business but that also gives Google even more power in the market.
Yahoo expects the deal to raise US$800 million in its first year and an extra US$250 million to US$450 million in incremental operating cash flow. That's a major increase, given that Yahoo reported revenue of US$1.53 billion in its most recent quarter, after commissions are factored out.
"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.
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, said Canaccord Adams analyst Colin Gillis.
"The reality is it's going to be hard to unhook from the Google cash flow," he 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.
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 US$250 million, minus the revenue Google earned, if it's terminated within 24 months.
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.
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 US$33 per share. Yahoo's shares dropped more than 10 percent, or US$2.63, to US$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.
"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 Eric Schmidt, chairman and CEO of Google. "This agreement will preserve the competitive and dynamic online advertising space."
This article was first published as a blog on CNET News.com.
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