U.S. Approves Microsoft-Yahoo Search Deal

Antitrust regulators in the U.S. and Europe have approved Microsoft's (MSFT) search advertising partnership with Yahoo (YHOO), giving the two companies a much needed boost in their quest to chip away at market leader Google's (GOOG) lead. The regulatory victories are a major boost for Yahoo CEO Carol Bartz, who made the search partnership a key component in her still-young tenure leading the one-time Internet pioneer.Microsoft's Bing search engine will provide search results for Yahoo's stable of content sites. The approval comes over two years after Microsoft launched an unsuccessful bid to buy Yahoo outright, leading to an unsuccessful takeover battle which ultimately resulted in the ouster of Yahoo co-founder Jerry Yang as CEO.

"An Exciting Milestone"

"This breakthrough search alliance means Yahoo! can focus even more on our own innovative search experience," Bartz said said in a statement. "Yahoo gets to do what we do best: combine our science and technology with compelling content to build personally relevant online experiences for our users and customers."

According to the terms of the agreement, Microsoft will pay Yahoo 88% of revenue generated from search queries on Yahoo sites for the first five years, saving Yahoo $200 million annually in capital costs.

"Although we are just at the beginning of this process, we have reached an exciting milestone," Microsoft CEO Steve Ballmer said in a statement. "I believe that together, Microsoft and Yahoo! will promote more choice, better value and greater innovation to our customers as well as to advertisers and publishers."

The ten-year deal, which was first proposed last July, has drawn concerns that combining the number two and three Web search companies would harm competition.

"After a thorough review of the evidence, the division has determined that the proposed transaction is not likely to substantially lessen competition in the United States, and therefore is not likely to harm the users of Internet search, paid search advertisers, Internet publishers, or distributors of search and paid search advertising technology," the Department of Justice said a statement.

EU authorities issued a statement saying the deal would "increase competition in internet search and search advertising by allowing Microsoft to become a stronger competitor to Google."

Pushing Forward

For years, Yahoo and Microsoft watched apparently helplessly as Google gobbled up search market share, generating billions of dollars annually in profit. Google currently dominates the Web search market, with 65.4% of queries, according to the most recent data from comScore. Yahoo is in second place with 17%, while Microsoft accounts for 11.3% of searches. Microsoft's Bing has been making impressive share gains, chalking up eight consecutive monthly share increases. But Yahoo has continued to struggle.

"Now they can push forward," Colin Gillis, an analyst at BGC Financial LP told Bloomberg. "It wasn't a given that you were going to get EC and U.S. approval. The investor concern was that if this process got politicized, both companies are stuck in limbo."

Microsoft and Yahoo are hoping their search pact will give them the scale necessary to mount a challenge on Google. They have an uphill battle. As UBS internet analyst Brian Pitz recently noted, "the combined Yahoo!/Bing entity had 28.3% share in Jan., down from 29.5% share" one year ago.

Google Shrugs

In response to the approvals, Google issued a statement downplaying the anti-competitive aspects of the deal. "There has always been robust competition in our industry, which keeps us on our toes and benefits users," a Google spokesperson said. "We compete against a number of alternatives, including traditional search engines, vertical search sites, social networks, and other forms of online and offline advertising."

Microsoft and Yahoo now face the difficult task of integrating their search operations -- a process that could take as long as one year. Unseating Google from its perch as the search market leader will undoubtedly be an even more difficult task.
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