MediaPost reports Microsoft adCenter, Bing’s search ads, will be testing placing favicons and logos in the search ads. I have conducted about 20 queries to try to bring up such an ad, but I personally do not see them myself.

MediaPost wrote, “James Colborn, director at Microsoft Advertising and long-time adCenter veteran, believes the market is ready to experiment with more creative options. These options stray from standard text ads in search. Consumers next year will start to see a richer ad experience in search results, he says.”

Yahoo has tested favicons in search ads in the past, as did Google with favicons in AdWords and favicons in organic results.

These days, you often don’t see favicons in the Google results, but you do occasionally see them in the Yahoo search ads.

If you do see them in adCenter (Bing Search Ads) do let us know.

It’s time for an online advertisers bill of rights. So says Harvard assistant professor Ben Edelman, who has spent years researching Internet advertising and compares the current landscape to a “wild west.” Edelman recognizes the “staggering” opportunity that online advertising provides, but says the current system has problems that “threaten to destabilize online advertising—wasting advertisers’ budgets, slowing transition to online formats, and reducing payments to online publishers.”

In his just-published proposal, Edelman outlines five-point bill of rights for anyone advertising online:

1. An advertiser’s right to know where its ads are shown.
2. An advertiser’s right to meaningful, itemized billing.
3. An advertiser’s right to use its data as it sees fit.
4. An advertiser’s right to enjoy the fruits of its advertising campaigns.
5. An advertiser’s right to resolve disputes fairly and transparently.

Edelman uses Google’s advertising services and policies as examples throughout his proposal, sharing specific examples of practices that he says are harmful to advertisers. He says many of the “starkest problems” can be traced to Google’s online ad system:

“Google does not tell advertisers where their ads will be shown, omits itemized billing, limits how advertisers can use and transfer their own data, and insists on convoluted dispute resolution. Why such one-sided terms from Google?”

Edelman says he hopes his report leads to “improvements in at least the norms and expectations, if not the regulation, of online advertising.”

The Yahoo Search Marketing blog announced the new pricing changes are now in affect within the auction pricing model used by Yahoo Search Marketing. Overall, Yahoo said most advertisers should notice a decrease in their click spend.

Yahoo also announced a new report that shows which Yahoo partners are clicks are coming from and how well they are performing. The report is named the ad delivery report and can be used to determine which partners you should block from displaying your ads.

On the Microsoft front, adCenter has added a “Ad Preview” tool. The tool doesn’t just show you a preview of your ad, as it would appear on Bing.com, but also helps reduce “unnecessary impressions and accidental clicks.”

Here is a picture of the tool:

Finally, a blog post from the Rim Kaufman group, a large PPC agency, shared that overall, his average client is seeing a 6.7% growth in August in PPC share from the major three engines. So maybe all that ‘bing’ for Bing is paying off (sorry, I had to).

Yesterday Microsoft and French advertising holding company Publicis Groupe announced that the latter was buying agency Razorfish. Razorfish came to Microsoft as part of the $6 billion aQuantive deal, the largest acquisition in Redmond’s history.

As part of the deal Publicis will give Microsoft 6.5 million shares, amounting to a roughly 3 percent stake in the holding company. The total value of the deal is estimated at $530 million. Just over half of that will be in cash. According to a statement by Publicis CEO Maurice Levy, “Once this acquisition is complete, about a quarter of our revenue will come from digital communication…”

In an earlier, parallel move, Publicis also bought Performics from Google almost exactly a year ago. Performics was part of the DoubleClick transaction.

According to the Wall Street Journal:

As part of the pact, Publicis has entered a “strategic alliance” with Microsoft, which includes a five-year media-buying relationship. In return for buying a certain amount of display and search advertising on Microsoft properties, Publicis will receive better ad rates.

Publicis also has similar sounding deal with Google, though there don’t appear to be any ad-buying quotas or favorable pricing as part of that relationship.

The Microsoft-Publicis deal includes paid search. One question is: how will this deal affect Yahoo’s role selling “premium search” on behalf of both Microsoft and itself? Publicis’ advertisers are all the kind that fall into the “premium” category.

First to pounce on the SEC 8-K filing by Yahoo was PaidContent, which provides an extensive bulleted list of many of the deal terms not revealed last week during the frenzy of conference calls and articles that followed the official announcement of the Microsoft-Yahoo search deal. CNET also writes about selected aspects of the deal contained in the filing, specifically an “escape clause” (termination) for Yahoo (see below). And the AP has a short piece on how the deal terms require Microsoft to hire at least 400 Yahoo employees.

Here are some verbatim excerpts from the SEC filing:

Negotiation and Execution of the Definitive Agreements

Pursuant to the terms of the Letter Agreement, the parties will negotiate and execute the Definitive Agreements as soon as practicable but in any event by October 27, 2009 (the “Negotiation Period”). If the Definitive Agreements are not executed during the Negotiation Period, the parties will submit any disputes regarding the final terms of the Definitive Agreements to an arbitration panel.

Conditions to Commencement and Termination Prior to Commencement

Prior to the Commencement Date, the Letter Agreement and Definitive Agreements may be terminated only by (a) mutual consent, (b) if a breach renders a condition incapable of being satisfied by the Termination Date (as defined below), or (c) if the conditions to commencement have not been satisfied by July 29, 2010 (the “Termination Date”); provided that Yahoo!, in its sole discretion, has the right to extend the Termination Date by six (6) months if the required antitrust approvals have not yet been obtained.

Search and Advertising Services and Sales Agreement

For a period of ten (10) years beginning on the Commencement Date (the “Term”), Microsoft will be Yahoo!’s exclusive technology provider for algorithmic and paid search services and Microsoft will provide contextual advertising to Yahoo! on a non-exclusive basis. Yahoo! will be the exclusive worldwide relationship sales force for Yahoo!’s and Microsoft’s premium search advertisers.

The services provided by Microsoft under the Search Agreement will be provided on all web sites, applications and other online digital properties owned or operated by or on behalf of (a) Yahoo!, Yahoo! subsidiaries and Yahoo! joint venture relationships, as well as on software applications developed or distributed by Yahoo! or Yahoo! subsidiaries that provide access to or enable algorithmic search services or paid search services (“Yahoo! Properties”) and (b) Yahoo! Syndication Partners (as defined below), as well as software applications developed or distributed by Yahoo!’s Syndication Partners that provide access to or enable algorithmic search services or paid search services from Yahoo! (“Syndication Properties”). “Syndication Partner” means a third party with whom Yahoo! has contracted to provide algorithmic search services or paid search services.

Subject to certain specified restrictions, Yahoo! will have full flexibility with respect to the user experience, content and look and feel on all of its web pages, and will also be entitled to use the paid search services and algorithmic search services for non-internet search queries with minimal restriction . . .

Microsoft’s mapping services and mobile search services. Yahoo! may implement each of the mapping services and the mobile search services on a non-exclusive or an exclusive basis. Yahoo! also has the option to work with Microsoft to implement the services on other platforms. If Yahoo! elects to receive services for other platforms, it must receive such services on an exclusive basis.

Revenue Share Payments and Other Payments

During the first five years of the Term, Yahoo! will be entitled to receive 88% of the net revenues generated from Microsoft’s services on Yahoo! Properties (the “Revenue Share Rate”). Yahoo! will also be entitled to receive its share (at the Revenue Share Rate) of the net revenues generated on Syndication Properties after the Syndication Partner’s share of net revenues is deducted. For new Syndication Properties during the Term, and for all Syndication Properties after the first five years of the Term, Yahoo! will receive its share (at the Revenue Share Rate) of the net revenues generated from Microsoft’s services on Syndication Properties after the Syndication Partner’s share of net revenues and certain Microsoft costs are deducted.

On the fifth anniversary of the Commencement Date, Microsoft will have the option to terminate Yahoo!’s sales exclusivity for premium search advertisers. If Microsoft exercises its option, the Revenue Share Rate will increase to 93% for the remainder of the Term, unless Yahoo! exercises its option to retain its sales exclusivity, in which case the Revenue Share Rate would be reduced to 83% for the remainder of the Term. If Microsoft does not exercise such option, the Revenue Share Rate will be 90% for the remainder of the Term.

Microsoft will also pay Yahoo! a payment of $50 million annually during the first three (3) years of the Search Agreement. Yahoo! may use these payments to partially cover transition and implementation costs not otherwise covered under the Search Agreement.

Termination Provisions

Yahoo! may terminate the Search Agreement if the trailing 12-month average of the RPS in the United States (the “U.S. RPS”) of Yahoo! and Microsoft’s combined queries falls below a specified percentage of Google Inc.’s (“Google”) estimated RPS measured on a comparable basis or if the combined Yahoo! and Microsoft query market share in the United States falls below a specified percentage; (d) on the fifth anniversary of the Search Agreement, and any time thereafter, Yahoo! has the right to terminate the Search Agreement if the trailing 12-month average of Yahoo!’s U.S. RPS is less than a specified percentage of Google’s estimated RPS; or (e) subject to exceptions, either party may terminate if a law, regulation or order would have a significant, adverse impact on a primary aspect of such party’s intended benefit of the Search Agreement.

Transition and Implementation Plan

Microsoft will hire not less than 400 Yahoo! employees (the “Transferred Employees”) and will offer the Transferred Employees market competitive compensation packages. In addition, Yahoo! and Microsoft will mutually agree on a retention plan to be paid for by Microsoft to assist in retaining the Transferred Employees and an additional 150 Yahoo! employees to be mutually agreed upon between Microsoft and Yahoo! to assist with providing the transition services.

The deal seems broader than the “web, image and video” search scope we heard before. Yahoo can terminate the deal if certain targets aren’t meet surrounding revenue per search, benchmarked to Google. At the five year mark the parties can change who runs “premium sales.” The rev share percentages change accordingly.

On a related note, there’s an opinion piece in the Wall Street Journal that argues these terms give Redmond a bigger win than Yahoo in Microsoft CEO Steve Ballmer’s “win-win” scenario but that, in the larger scheme of things, Google may have already won the game:

The deal is a clear win for Microsoft and a qualified win for Yahoo. The big question is whether it makes any difference in the only contest that really matters, which is the one with Google. The risk for both Microsoft and Yahoo is that the contest is already over. Second place won’t really matter, especially as the competition shifts to Microsoft’s home turf: operating systems.

Related coverage:

• It’s Finally Official, Microsoft & Yahoo Make A Deal, Yahoo Gives Up On Search
• Live Blogging The MSFT – YHOO Search Press Conference
• Microsoft-Yahoo Deals 2008 & 2009, Side-By-Side
• A Search Eulogy For Yahoo
• Micro-Hoo Details: Q&A With Mehdi & Schneider
• The Microsoft-Yahoo Search Deal, In Simple Terms

A report (PDF) by LegitScript and KnujOn claims that of the prescription drug and online pharmacy search ads on Bing (i.e. adCenter), Microsoft’s search engine, 89.7% led to “rogue” Internet pharmacies. By “rogue” they mean Internet pharmacies that fall into the categories of:

1. Those that facilitate the sale of prescription drugs, including controlled substances, without requiring a valid prescription.
2. Those that sell drugs from sources that are not licensed as a pharmacy in any US jurisdiction.
3. Those that illegally source unregulated, unapproved prescription drugs from outside of the United States.
4. Those that are otherwise deceptive or misleading.

This study was done over the June or July 2009 months and only examined Bing’s search ads, not the organic listings. Microsoft currently has not commented on this report.

LegitScript is an Internet pharmacy verification organization identified by the National Association of Boards of Pharmacy (NABP).

Danny and I had an opportunity to talk with Microsoft SVP Yusuf Mehdi and Yahoo EVP Hilary Schneider earlier this morning. Both were instrumental in the deal and will be deeply involved going forward. They characterized the parties’ search integration as a long-term partnership, which implies ongoing cooperation and a high degree of collaboration.

We had a limited time to get a range of questions out but we were able to get a bit more clarity than we had from just the conference call and press release this morning.

Yahoo is going to be doing “premium search” sales. What is “premium search”?

Hilary Schneider explained that the bulk of growth in paid search spending over the next several years is going to come from “medium and larger” advertisers (think: Fortune 1000, brands). She said that “2/3 to 3/4 of all the spend” will be coming from larger advertisers. Yahoo will be the partner servicing and selling those categories of advertisers, which also feature “more complexity in their campaigns.” Smaller advertisers will deal directly with adCenter’s self-service platform. SEM firms using APIs will deal directly with Microsoft. Indeed, all search-related APIs will be supported by Microsoft.

Hilary said advertisers that had been pre-briefed were “thrilled” that they would be getting more scale via the deal. Yusuf Mehdi added that Microsoft and Yahoo would “go out jointly to the market to explain” how accounts will be handled going forward.

At the five year mark, Yahoo apparently has the unilateral option to alter the sales arrangement if it so chooses.

One outstanding question: Since Microsoft will have its own display advertisers — display is not part of the deal — presumably there will be some large/brand advertisers that have relationships with both Yahoo and Microsoft. It’s not clear how those situations will be handled. Who “owns” the relationship in such cases?

What does the agreement cover precisely?

The deal covers “web, image and video search.” Mehdi explained there will be a single crawl and a single index that both parties will have equal access to — “parity” in his words. He made the additional point that Google never provided full parity to partners and third parties using its index.

Yahoo has a broader option but is not required to use Microsoft in areas beyond those explicitly mentioned above — for example in Maps and Mobile. Hilary emphasized that Yahoo “remains committed to owning the user experience,” but could well use Microsoft search results more broadly than in just the web, image and video categories. It’s plausible that at some point Yahoo might simply adopt Virtual Earth as its own mapping platform (however I’m speculating entirely there).

Also note that if there is a single crawl and a single index, as Yusuf Mehdi explains, Yahoo will in fact need to use that index in other areas that do rely on a search crawl as opposed to structured data feeds from third parties.

What about BOSS and SearchMonkey?

Mehdi said that Microsoft will be taking them on (”the code and the responsibility”). Beyond this he suggested that Bing would be incorporating the best of Yahoo’s search assets and user experience into its platform and technology, including, for example, Search Monkey.

I then asked the follow-up question: If Bing incorporates the best of Yahoo Search and Yahoo is using the same index and has the same results as Bing, what will differentiate the two engines or sites in the future?

The answer was general: Yahoo will do UX innovation in mobile and on its various internet properties. The contention is that greater scale and a unified platform permits greater innovation for both parties “on top” of the core search index and technology. But it’s not clear how that will play out in a specific user-experience ways.

What happens with contextual advertising?

Medhi said that “We’ll build it and Yahoo will sell it.”

How will the deal affect Yahoo’s newspaper consortium?

Yahoo’s newspaper relationships have repeatedly been cited as strategic for the company. As might be expected Hilary Schneider said that this deal would make those partnerships better. The newspaper publishers have started to sell Yahoo search as well as display advertisering. She added they would now get greater reach through the combined platform and partnership.

What happens in 10 years?

The term of the announced deal is 10 years. What happens when it expires? Hilary Schneider said that she hoped that the partnership would be very successful and that it would be a “lifetime partnership.”

What do you say to the people who contend that this deal is a win for Microsoft and that Yahoo has given up in search?

They disagreed with that contention, as one would expect. In particular, Hilary Schneider emphasized that over the long term it would constitute “a winning play” for Yahoo because it would strengthen the company’s relationships with advertisers and provide a stronger platform. She added that she believed the deal would “accelerate innovation” and allow Yahoo to invest more aggressively in consumer experiences that are now the core focus of the company under CEO Carol Bartz.

There are still a number of unanswered questions, and some probably that the parties haven’t answered for themselves. We’ll have much more to say over the next several days on the topics touched upon here, as well as others.

Related coverage:

• It’s Finally Official, Microsoft & Yahoo Make A Deal, Yahoo Gives Up On Search
• Live Blogging The MSFT – YHOO Search Press Conference
• Microsoft-Yahoo Deals 2008 & 2009, Side-By-Side
• A Search Eulogy For Yahoo
• The Microsoft-Yahoo Search Deal, In Simple Terms

As expected, Microsoft and Yahoo have finally struck a deal, one that with regulatory approval, they hope will be in place by early 2010. Microsoft has issued a press release and created a minisite about the deal. A press conference is happening later today (which we’ll live blog), and we’ll have continuing coverage. The details so far:

• The term of the agreement is 10 years
• Microsoft will acquire an exclusive 10 year license to Yahoo!’s core search technologies, and Microsoft will have the ability to integrate Yahoo! search technologies into its existing web search platforms [Note from Danny Sullivan: Exclusive suggests Yahoo itself won't be able to use the technology or develop it, which means after 10 years, what's left probably isn't that useful]
• Microsoft’s Bing will be the exclusive algorithmic search and paid search platform for Yahoo! sites. Yahoo! will continue to use its technology and data in other areas of its business such as enhancing display advertising technology.
• Yahoo! will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers. Self-serve advertising for both companies will be fulfilled by Microsoft’s AdCenter platform, and prices for all search ads will continue to be set by AdCenter’s automated auction process.
• Each company will maintain its own separate display advertising business and sales force.
• Yahoo! will innovate and “own” the user experience on Yahoo! properties, including the user experience for search, even though it will be powered by Microsoft technology. [Note from Danny: AOL used similar words about how it would somehow make Google-powered search "better" despite not owning the technology. People still went to Google].
• Microsoft will compensate Yahoo! through a revenue sharing agreement on traffic generated on Yahoo!’s network of both owned and operated (O&O) and affiliate sites.
  • Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88% of search revenue generated on Yahoo!’s O&O sites during the first 5 years of the agreement.
  • Yahoo! will continue to syndicate its existing search affiliate partnerships.
• Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country. [Note from Danny: What's the amount? And this is far shorter than I'd have expected].
• At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.
• The agreement protects consumer privacy by limiting the data shared between the companies to the minimum necessary to operate and improve the combined search platform, and restricts the use of search data shared between the companies. The agreement maintains the industry-leading privacy practices that each company follows today.

A live webcast of the conference call can be accessed through the companies’ Investor Relations websites at http://yhoo.client.shareholder.com/results.cfm and http://www.microsoft.com/msft. In addition, an archive of the webcast can be accessed through the same links.

Danny is now live blogging the conference call.

See our related coverage:

• Live Blogging The MSFT – YHOO Search Press Conference
• Microsoft-Yahoo Deals 2008 & 2009, Side-By-Side
• Micro-Hoo Details: Q&A With Mehdi & Schneider
• A Search Eulogy For Yahoo
• The Microsoft-Yahoo Search Deal, In Simple Terms

Photo by Yahoo.

There are reports coming out of the Wall Street Journal and AllThingsD that a search/ads deal between Microsoft and Yahoo will be announced within the next 24 hours. According to the Journal’s coverage:

The likely deal, which has yet to be approved by either company and could still be delayed further, involves Yahoo agreeing to use Microsoft’s search engine on its own sites. But in a shift from earlier discussions, Yahoo would handle selling the text ads that appear next to the search results for its sites and some Microsoft sites, say these people, boosting Yahoo’s share of the search advertising business . . .

Both companies have expressed concern with whether a deal that consolidated the search market under Microsoft or Yahoo would be opposed by regulators for cutting a player out of the market, people familiar with the discussions say. These people say both sides plan to argue that any deal would help both businesses fight online advertising leader Google Inc., enhancing competition.

PaidContent also has some additional information about the potential deal. We’ll weigh in more fully on the terms and implications if/when they’re formally announced.

Microsoft reported worse-than-expected earnings yesterday. The company was about a billion dollars off analysts consensus expectations. According to the Microsoft release, the company had huge revenues but still missed:

$13.10 billion for the fourth quarter ended June 30, 2009, a 17% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $3.99 billion, $3.05 billion and $0.34 per share, which represented declines of 30%, 29% and 26%, respectively, when compared with the prior year period.

For the full fiscal year revenues were $58.44 billion, a 3 percent decline from fiscal 2008 and the first time that sales had declined in the company’s more than 30 year history. The decline was blamed on the economy, among other factors, but also the rise of netbooks. According to Microsoft netbooks have a roughly 11 percent share of the PC market. Microsoft’s OS dominates there but margins are much smaller.

Online business services, which houses Microsoft’s various online and internet ad businesses saw revenues of $731 million in the quarter. That compares with $837 million a year ago, a 13 percent decline. The unit lost $732 million in the quarter (compared with $485 in the same period last year) and for the full fiscal year there was a loss of $2.25 billion. Some people are speculating that these results and tepid guidance for the future will mean more job cuts.

Against this backdrop the Wall Street Journal is reporting that Yahoo’s board is meeting to discuss a potential search (and display ads) deal with Microsoft:

Yahoo Inc. directors plan to meet Thursday for an update about a potential search partnership with Microsoft Corp., according to people briefed about  the meeting.

The meeting follows several Yahoo board calls in recent days, organized as talks between the parties continued to progress, according to one person familiar with the matter.

There’s been lots of buzz and speculation that a deal between the companies is “imminent.” The Journal article suggests that some Yahoo board members are fearful of potential objections from regulators who essentially forced Google to abandon the search-ads deal it struck with Yahoo. That earlier Google-Yahoo deal was partly responsible for thwarting Microsoft’s acquisition of Yahoo.

The scope of a deal between Microsoft and Yahoo has also been a matter of considerable speculation. After the initial collapse of the acquisition talks between Microsoft and Yahoo, Redmond tried unsuccessfully to buy just the search portion of the business. Now the question is: if a deal does happen will Bing essentially take over Yahoo search? In other words, will we see: Yahoo search, “powered by Bing.”

I think a wholesale substitution of Yahoo search with Bing is unlikely. More likely in my mind is a deal that resembles (and expands upon) the one that Google struck with Yahoo, allowing Microsoft adCenter advertisers to gain distribution in Yahoo search results. But it’s also likely to contain a, perhaps reciprocal, display component.

Some sort of deal is almost certain but we’ll have to wait to see what it includes and what is left out. One indication that a deal is likely is Yahoo CEO Carol Bartz’s favorable remarks regarding Bing. On the earnings call she fumbled a bit initially when asked about Bing’s impact on Yahoo, as though taken by surprise, but ended with a compliment:

Sandeep Aggarwal – Collins Stewart

What is your first impression on Bing and are you seeing any visible changes in user behavior at Yahoo! search after the big launch?

Carol Bartz

I think actually Bing is a good product. It actually extends sort of the experimentation around search and how people use it instead of just thinking like a standard blue link. I think they have done a good job. Unfortunately it is only a month into it so it is pretty hard to understand whether it is just curiosity driving what is happening or they are actually going to gain share. I think Microsoft should be given kudos for Bing. I think they have done a nice job.

This stands in contrast to her early somewhat sarcastic remarks about Bing:

Bartz also said she was not concerned that Microsoft’s new search engine—Bing—may have surpassed Yahoo in market share for one day last week, according to a report by StatCounter. “One day is one day,” she said. “They didn’t beat us by much. It was one day. I think it’s gosh maybe it was in Omaha some place; It was some small area.”

So let’s assume a deal (maybe in the next two weeks). Once that happens the Justice Department scrutiny and regulatory approval process can begin. It’ll be a deja vu experience for everyone involved, except Google and Microsoft will have switched roles.