• by Tameka Kee , June 13, 2008

Just hours after final talks with Microsoft broke down, Yahoo announced an official paid search placement deal with Google: A 10-year, non-exclusive partnership that Yahoo President Sue Decker said would improve the company's access to the paid search universe, "but on terms that work for us."

Those terms include a four-year initial agreement, with options for renewing the contract in three-year increments afterward, flexibility for Yahoo to choose which pages the Google search ads show up on, as well as control over how the ads are displayed. "Advertisers will pay Google directly for the ads that show up on Yahoo sites," Decker said. "And Google will pay Yahoo TAC (traffic acquisition costs) from the click-throughs."

Decker and Yahoo CEO Jerry Yang outlined the details of the agreement--which the company estimates will net it between $250 million and $450 million in incremental income in the first 12 months--during a shareholder conference call late Thursday afternoon. The news came just hours after Yahoo's stock tumbled 10% on reports that "last chance" acquisition talks between the Web giant and Microsoft ended negatively.

Yang reiterated that Microsoft was "unequivocally" no longer interested in an outright acquisition, and had offered to purchase Yahoo's search business to the tune of $33 per share. But Yahoo's board determined that giving up all of search wasn't in the company's best interest, particularly in light of the increasing convergence of search and display advertising. The deal would have left Yahoo "with no independent search business," Yang said. "Clearly, it's time to move on."

Yang acknowledged that the Google search deal would likely encounter some regulatory scrutiny, and said that both companies were prepped to halt implementation for up to three-and-a-half months pending review.

Both Decker and Yang touted the openness of the deal as a crucial factor. For example, Google will only be helping to monetize long-tail search terms (like "black 32 inch flat panel HDTV," while Yahoo will still be able to sell PPC ads for broad, commercial terms, like "Panasonic HDTV."

"We can take advantage of where Google performs really well," Decker said. "And still deliver our own results where we can offer comparable or better value." Yahoo can choose how many or how few Google ads get served, and since it is non-exclusive, the deal leaves room for another third-party search provider to serve ads on Yahoo properties as well. During the conference Q&A, Decker also alluded to the possibility of a similar arrangement in which Yahoo would serve some of the display ads on Google sites in the future.

Still, some in the industry have questioned whether Yahoo brass thought about the repercussions of the deal in terms of competition and advertiser perception in the mid- to long-term.

"I think the financial rationale is pretty clear," said Bryan Wiener, CEO of 360i. "But $450 million is a lot of money, so it can't just be all tail terms that Google will be serving. I can't imagine that there won't be some very valuable commercial terms in that mix." Wiener said that if advertisers no longer saw the value in buying keywords directly through Yahoo, then fewer companies would end up using (Yahoo's Search Advertiser Platform) Panama in the long run.

According to Neeraj Kochhar, vice president/director of SMG Search, there are definite concerns among advertisers. "I don't see this as a positive move in terms of competitive activity," Kochhar said. "Some of our clients welcomed a Microsoft/Yahoo deal because it could have created a combined entity that would have been a real alternative to Google, if only for the sake of maintaining pricing in the marketplace. Now what are they going to do--go to Microsoft? And what is Microsoft going to do--roll out another cash back program?"

Kochhar also said that the deal may have unexpected ill effects on Yahoo in the midst of the rocky economy. "Google is getting the more efficient piece of search," Kochhar said. "Broad, commercial terms are more expensive and are more likely to be subject to under-investment, particularly in times of budget pressures."

Kochhar said that the long tail was more "recession proof" for agencies and SEM vendors because they could track sales directly back to those clicks. "The long tail holds onto the click, particularly when it comes to analytics programs," he said.

And as for Yahoo possibly serving display ads for Google, Wiener didn't buy it.

"That would completely undermine Google's value proposition of creating one system and one account person for an integrated search, video, display, TV and radio buy," Wiener said. "It could be something they might do as a backfill--but not a primary deal."