In its attempt to ward off Microsoft, Yahoo! had run a beta test with Google in April this year, wherein, Yahoo! ran Google AdSense for Search ads alongside Yahoo! Search results.
The two leading search engines have now decided to consolidate the deal, and extend the contract into a broad-based partnership. Under the terms of this agreement, Yahoo! will display Google ads alongside their own organic search results in the U.S. and Canada, and outsource a part of their search ad inventory to Google. They will retain the right to do the same with other providers as well.
Yahoo! will have the discretionary powers to decide which pages the Google AdSense for Search and AdSense for Content ads will be displayed on. This deal will not affect their actual organic search results in any way.
Though details of the financial transaction are not available, the deal is expected to generate an additional, $800 million in revenue for Yahoo! annually. In the first year itself, there is expected to be an increase in cash flow ranging from $250-450 million.
Yahoo! will follow the same open bidding system as Google AdWords, to deliver third party ads to their search results, thus making it possible to include Microsoft in the scheme of things.
In order to avoid any hassles with anti-trust laws, at a later stage, Yahoo! and Google have decided to wait for three and a half months, before implementing the deal, thus giving the U.S. Department of Justice, enough time to study the implications of the deal.
As of now, the deal will continue for a period of 10 years. An initial period of 4 years, followed by two terms of 3 years each, at Yahoo!’s option.
Both companies have the option to terminate the deal, in case of a change in management of either organisation. However if Yahoo! chooses to terminate the deal within the first 2 years, it shall be liable to pay Google a termination fee of $250 million less 50% of the revenue earned by Google through the deal.
As an additional incentive, the companies have agreed to allow interoperability of their instant messaging services.
Google’s chairman and CEO, Eric Schmidt, says “This commercial agreement, provides Yahoo! with the opportunity, to deliver more relevant ads to users, and provide advertisers and publishers with better, advertising technology.”
It is believed that this deal will further strengthen Google’s dominance in the search advertising market, while at the same time finally pulling down the curtain on the possibility of a deal between Yahoo! and Microsoft.,
Investor Carl Icahn’s reactions on the issue are yet to be known as his strategy to replace the board of directors at Yahoo! depended on Microsoft’s interest in buying over Yahoo!