Yahoo-Google Ink Search Deal; But Does it Fly?

As Techcrunch reported, Google and Yahoo! inked a search deal. While early reports said such a deal would be limited, the actual agreement sounds somewhat expansive–and is far from a slam dunk when it comes to approval of government regulators. See the full release below.

* The deal enables Yahoo! to run ads supplied by Google alongside Yahoo!’s search results and on some of its web properties in the United States and Canada
* It also allows Yahoo to run ads on other third parties, and Yahoo!’s own Panama marketplace.
* The agreement also applies to current partners in Yahoo’s publisher network.

This could be a landmark case for the application of anti-trust law to the Internet search market. With Google dominating the market, it’s hard to see how regulators are going to let this fly without altering the deal, or putting the kibosh on it entirely.

What do you think?

Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With Google

Agreement Advances Yahoo!’s Open Strategy; Enhances Ability to
Compete in Converging Search and Display Marketplace

SUNNYVALE, Calif., Jun 12, 2008 (BUSINESS WIRE) — Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, announced today that it has reached an agreement with Google Inc. that will enhance its ability to compete in the converging search and display marketplace, advancing the company’s open strategy. The agreement enables Yahoo! to run ads supplied by Google alongside Yahoo!’s search results and on some of its web properties in the United States and Canada. The agreement is non-exclusive, giving Yahoo! the ability to display paid search results from Google, other third parties, and Yahoo!’s own Panama marketplace.

Under the terms of the agreement, Yahoo! will select the search term queries for which – and the pages on which – Yahoo! may offer Google paid search results. Yahoo! will define its users’ experience and will determine the number and placement of the results provided by Google and the mix of paid results provided by Panama, Google or other providers. The agreement applies to paid search and content match and does not apply to algorithmic search. The agreement also applies to current partners in Yahoo’s publisher network.

Yahoo! CEO and co-founder Jerry Yang said, “We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry. Our strategies are specifically designed to capitalize on this convergence — and this agreement helps us move them forward in a significant way. It also represents an important next step in our open strategy, building on the progress we have already made in advancing a more open marketplace.”

“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,” said Yahoo! President Sue Decker. “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.”

Agreement Provides Attractive Economics and Enhances Search Monetization

Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!’s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow.

The agreement will enhance Yahoo!’s ability to achieve its goal to grow operating cash flow significantly, while at the same time providing flexibility to continue to invest in ongoing initiatives such as algorithmic search innovation and search and display advertising platforms. It gives Yahoo! complete flexibility to continue to use its Panama paid search results.

Significant Benefits Will Flow to Users, Advertisers, Publishers and Employees

Users will also benefit from Yahoo!’s ability to invest incremental operating cash flow in ongoing improvements to its search services, building upon recent major innovations such as Search Assist and SearchMonkey. Advertisers will continue to benefit from multiple marketplace alternatives including Panama, Google and others. Publishers will benefit from a winning combination of distribution, monetization and services to help them grow their businesses. The financial benefits will enable Yahoo! to broaden the scope of its investments and initiatives, enhancing Yahoo!’s ability to offer attractive career opportunities to its employees.

Terms of the Agreement

The agreement will enable Yahoo! to run ads supplied by Google’s AdSense(TM) for Search and AdSense(TM) for Content services next to Yahoo!’s internally generated paid search and algorithmic search results. Yahoo may also run Google-supplied ads on non-search Yahoo web properties, as well as on current members of its partner network. The agreement has a term of up to ten years: a four-year initial term and two, three-year renewals at Yahoo!’s option. It applies to Yahoo!’s operations in the U.S. and Canada only. Advertisers will continue to pay Yahoo! directly for clicks served by Yahoo! from Yahoo!’s Panama and Content Match marketplaces. Advertisers will pay Google directly for each click on Google paid search results appearing on Yahoo! owned and operated network or certain affiliate sites. Google will share a percentage of such revenue with Yahoo!.

In addition, Yahoo! and Google agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users.

The agreement allows either party to terminate the agreement in the event of a change in control of either party. The agreement also requires Yahoo! to pay a termination fee if the agreement is terminated as a result of a change in control that occurs within 24 months. The termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement.

Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.

Goldman, Sachs & Co., Lehman Brothers and Moelis & Company are acting as financial advisors to Yahoo!. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Yahoo!, and Munger Tolles & Olson LLP is acting as counsel to the outside directors of Yahoo!.

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