Mobile by itself, excluding tablets, is about 10 percent of search impressions. Tablets account for almost 2% of all paid search impressions and roughly 14% of all mobile impressions. Thus mobile + tablets = 12 percent of overall paid search impressions.

Here are some other findings from Performics’ data dive:

• Mobile clicks represent 11.9% of all paid search clicks (June). Tablets account for  13.3% of all mobile clicks.
• CTR: Mobile and tablet devices have caught up in the past two months with the PC for CTR. (However other data show higher mobile CTRs vs. PC)
• PPC: “Mobile and tablet[s] . . . continue to track significantly below desktops”

There’s an interesting discussion of dayparting, comparing mobile, PC and tablet usage:

Initial tablet search behavior by time of day closely resembles existing mobile habits—usage peaks during off-work hours.  While PC searches peak between the hours of 9AM and 5PM, mobile and tablet usage peaks between the hours of 5PM and 10PM.  However, while mobile devices also see moderately strong search usage between the hours of 11AM and 5PM, tablet devices are almost exclusively restricted to the evening period.

Tablets and mobile device usage complement PC search according to Performics. However tablets “are almost exclusively restricted to the evening period.” There are other data that argue, not necessarily directly contradicting Performics, that tablets cannibalize PC usage.

To summarize, then, Performics says that mobile volumes and CTR are growing, while PPC prices are below desktop levels. This suggests a “buying opportunity” to me.

Mobile attribution is key to helping validate the channel and monetizing the high quality leads it delivers.

Mobile Searchers Need It Today

Consider the mobile searcher profile. Leads that come from a mobile search program are not only more likely to buy, but will often times convert to a customer within hours.

According to Google’s stats, shared at a recent Mobile Marketing Association forum and reported on SEL by Greg Sterling earlier this month:

• 58% of mobile users are on the mobile web at least once a day
• 90% of mobile users search/lookup local information
• 87% of local mobile searchers take action from their search

Mobile search is locally focused and all about instant gratification as searchers are typically looking for something that they need the same day.

Consider your own habits: on a weekend day trip, you might make plans on the way there, searching for a place to stop for lunch and calling about a kids menu and reservations, calling about the hours of a special exhibit for a local museum or calling a couple hotels to find out about availability when you decide to stay the night.

Calls Are Top Mobile Performance Metric

Smartphones are transforming the search landscape, and calls are the de facto performance metric as the device’s primary use is for voice service. Our internal data reveals that more than half of all calls driven by local search ads are made from mobile phones – this is nearly double the number from a year ago.

Consumers calling from their mobile phones stay on the phone with businesses longer (more than three minutes per call) and longer call durations indicate a greater propensity to buy/convert. While mobile calls may be longer because there is less robust information available on mobile websites and apps, mobile consumers are closer to the point of purchase.

Mobile Leads Command Higher Monetization Value

The recent BIA/Kelsey’s mobile outlook forecasts that mobile ad spending will grow to $2.8 billion in 2015 with locally-targeted ads comprising 70 percent of that value. As the mobile growth rate is skyrocketing, I expect the 2015 figure will explode.

Mobile leads are truly ready to buy, so mobile ad networks and other mobile ad providers can command a higher price for mobile calls in a pay for performance-based model. And, while clicks are still a standard mobile metric, measuring calls reveals greater consumer insights and is a way to truly evaluate the monetization potential of newer mobile properties—including appropriate verticals, pricing of calls, and optimization opportunities.

The lead quality from mobile callers is so strong that mobile ad providers can price calls (in a pay for performance model) at almost twice the amount of SEM-driven calls. While the price differential in most cases is warranted, mobile programs priced too high could discourage advertisers. So it is crucial to evaluate caller data and compare with other media to help appropriately price calls.

Mobile Requires Unique Approach

Like any media, mobile has its own unique profile. So best practices from online search or other channels shouldn’t be transferred without testing first.

As an example, mobile searchers are more likely to have a location qualifier so the keywords used to search should be different as well. Knowing how mobile callers arrived at an advertiser, listing or phone number and optimizing for more of those callers is key.

Without a doubt, mobile monetization depends on appropriate attribution. This includes tracking calls and providing drill down analysis of call response data – from total call volumes to caller demographics to call durations.

Whether you are an advertiser or advertising provider, if you don’t have a mobile program, you are leaving money on the table. Harness the power of instant gratification by measuring and monetizing your mobile efforts.

I spent the past couple of days at Borrell Associates Local Online Advertising Conference in New York City. This event was primarily focused on strategies and tactics that executives from traditional media companies should be looking at to survive and thrive in the increasingly competitive “local” space—but offered some interesting insights for all online marketers, old and new, small and large alike.

So, what’s happening?

First, mobile advertising has not just finally “arrived”—it is growing at comparable rates to the adoption of smart phones and pads. We’re talking at least doubling every year for the next five years, with mobile actually becoming the dominant mode of online advertising by 2015. Put another way, that means mobile ads will grow from about a 15% share today to more than 60% in 2015, according to Gordon Borrell, CEO of Borrell Associates.

Hype? I don’t think so. Borrell has a consistent track record of being right on trends—and being conservative, relative to other market researchers.

Second, the concept of “local” as a meaningful way to segment audiences is gradually becoming obsolete, as mobile devices, which make location implicit in all online activities, have nudged personal computers onto the same track to oblivion as microcomputers and mainframes, back when the PC “revolution” swept the older technology away.

And finally, the catastrophic losses experienced by traditional media may have—at last!—plateaued, as the so-called “dinosaurs” (newspapers, radio and television and other offline media) have finally stopped panicking and are experimenting with innovative models that have not only stanched the revenue bleeding but are also back to doing what they always did—finding a sustainable revenue stream to support quality journalism and content creation.

The bad news: According to keynote speaker, “disruption” expert and Harvard Business School professor Clay Christensen, only about 10% or so of the incumbents will actually survive to thrive in the new era. According to his research, all survivors share two traits, without exception:

First, they create a separate operating division that’s charged with creating a new business model that’s totally free of interference from the legacy business. This is true across the board—while it’s fine for the new unit to cherry-pick some of the best ideas of the legacy businesses, there must be no interference or blending of staffs (e.g. – no creating “synergies”). No influence (or even communication) from the established business over the strategy and tactics of the new business unit.

Second, and most important, the new business unit must be charged with the mission of killing the old. This is a ruthless and (from a Harvard Business School standpoint, anyway), counterintuitive strategy, but Christensen says his research over decades is unambiguous. Again, without exception, this is the only way established businesses have been able to innovate, survive and thrive.

Christensen was a truly motivational speaker. He himself is a survivor, having just returned to public speaking after battling cancer, recovering from a heart attack and re-learning to speak after suffering a stroke that savaged the language areas of his brain. He encouraged the audience to “fill in the blanks” whenever he grasped for a word his brain “knew,” but he couldn’t access to pronounce. In a sense, he was a living embodiment of how a famously successful force of nature must struggle to face new realities and new challenges when the “operating environment” suddenly, and disruptively, changes. For more on Christensen and how he’s confronting his challenges, see the current cover story of Forbes.

All of the speakers from traditional media at the conference claimed that they were endorsing and embracing the principles Christiansen was espousing. However, a number of knowledgeable attendees, including Search Engine Land’s local guru Greg Sterling expressed skepticism. Having worked for years as a management consultant, I share Greg’s skepticism. Change is difficult, and singing the praises of the “new way” is far easier than making the difficult decisions to change and innovate to take advantage of new realities.

But for the first time in my experience, I saw people from “dying” industries genuinely excited about the future, and for the roles they could play in participating in the future, rather than whining about how “amateurs” like Huffington Post and AOL’s Patch were “compromising” their ideals and dragging the notion of quality content creation into the gutter. So color me skeptical, but optimistic.

And to me, despite years of asking “are we here yet,” I believe the stats on the mobile ad marketplace. We are “here,” and we’re continuing to move forward, at a pace that’s likely to be as rapid as the adoption of the iPhone and iPad.

Bottom line: Regardless of where traditional media goes, search marketers should be looking very carefully at the mobile space and making moves to create a strong presence on mobile devices, before competition gets intense. It’s still a relatively small market, but is poised to be the next big wave in online marketing.

We believe Apple could utilize data unavailable to Google, data generated by the company’s App Store, to create a mobile centric search engine, which would be a unique offering to Google’s search engine.

An iPhone specific search engine could be a difficult undertaking, but we feel Apple could make a minor acquisition of a search company that has built a web index, like a Cuil, and utilize the index as the base for building its own engine.

We believe the odds of Apple developing a search engine in the next five years are 70%. One hurdle for Apple in developing its own search engine would be generating enough advertiser interest to form a competitive marketplace; however, we believe the rationale for an Apple search product is to protect data rather than generate profit.

The key idea here, according to Munster, is defensive: “we believe the rationale for an Apple search product is to protect data rather than generate profit.” An article in eWeek elaborates the thinking further:

Munster said protecting valuable consumer data and not profit would be the point for Apple’s mobile search engine.

“The data generated on the iPhone OS platform must become an increasing priority for Apple and we believe the company has the resources to develop its own products in both maps and search in the next five years,” Munster said.

He added that Apple could entice enough major advertisers and local resellers like ReachLocal to use the Apple search platform to make a meaningful market place and potentially operate a search product at break even.

Danny Sullivan in a recent column for AdAge argues that Apple is unlikely to develop its own search engine:

[B]uilding a search engine is hard. Damn hard. Just ask Microsoft, which has spent hundreds of millions of dollars to build its own and millions more to market it. Even then, Bing has barely made a dent against Google. It was no iPhone-like product that revolutionized an existing market.

But couldn’t Jobs work some of his magic and transform search in a way that would cause people to flock to an Apple search engine? I doubt it. When you ask people what they most want in search, it’s relevancy and speed. A pretty user interface is far down the list. And developing a relevant search engine is incredibly hard. You need many engineers skilled in search, which Google and Microsoft are already fighting over. You need to pull back billions of pages. You need lots of data centers for blazing speed.

An easier way forward would be to buy someone else’s technology and improve it. Yahoo would have been a great fit — but Yahoo’s going to Microsoft now. There’s Ask, but it has lost talent over the years. Building from scratch isn’t impossible. But by the time you build your search engine to today’s levels, your competitors have probably moved far past you.

I agree with this logic; building a competitive search engine is very expensive and then there is the consumer-behavior mountain to climb. I suppose it’s not entirely out of the question if Apple agrees with Munster that its data need to be shielded from Google’s view. (Google will have several years worth of that data by the time Apple does anything, so it might all be moot.)

Though I believe it’s extremely unlikely that Apple will build its own search engine, few would have predicted Apple getting into the mobile advertising business with its Quttro acquisition.

Danny initiated the compressed session by asking the time-honored question about local online marketing and small business: “Why aren’t local businesses getting it?” Interestingly most of the panelists disagreed with that characterization.

John Hanke: “I feel like the stampede has started.” He added that “several million business” have used the local business center and later referenced Google’s simplified ads as directed toward small businesses.

Blaise Agüera y Arcas was more tempered: “It’s definitely accelerating but it’s still early.” He argued that there are millions and millions of local businesses in the US and this is a vast opportunity that remains largely untapped. (It’s really not that early in this discussion of small business and online marketing, but years from now 2009-2010 may be seen as the beginning of a new phase in the market.)

Yahoo’s Tom Wailes agreed with the notion that small business usage of online marketing is gaining momentum. However, he said that business owners are so busy and time starved, they need to see the ROI very directly. He argued that would be more apparent if online marketing were more directly tied in to offline sales and the POS system.

Reviews and local:

Danny then shifted to the topic of reviews, their integrity and how these sites protected against false or fraudulent reviews.

Dylan Swift discussed how Yelp protects the integrity of its reviews and described the Yelp algorithm and the site’s review filtering process. (This has been one of the things that has driven confusion and in some cases anger among some local businesses who don’t understand it. More recently Yelp has made a much bigger effort towards transparency in this process.)

John Hanke downplayed the danger of “scam reviews.” His response was that publishers should “raise the level of overall participation” rather than worry about filtering out negative reviews in particular. His view was that people can relatively easily spot fake reviews.

Tom Wailes advocated that “Reviews are good but they don’t go far enough in many cases.” He said that he sees recommendations as a complement or even successor to reviews.

John Hanke then added that he believed some of the new, simplified “dashboards” (analytics) being offered to small businesses were very beneficial and would help them see the value of online much more explicitly.

Street-level imagery:

John Hanke said he believed that Street View is “critical to local search.” Part of this is because of the images but part of it has to do with data collection. Said Hanke, Street View offers “ground truth about businesses: does it exist, where is it located?” This new method of data collection, he argued, contributes to a very precise local database.

Microsoft’s Blaise Agüera y Arcas agreed and lauded Google “for making investments before many of the use cases were obvious.” He then discussed the imagery as a “canvass” or the basis for layers and layers of data on top of that basic imagery. It also paves the way for augmented reality in maps (Bing Map Apps).

Dylan Swift said that Yelp focuses on photos inside businesses. He said that after Yelp added mobile check-ins to its new iPhone app, there was a huge increase in the number of images being uploaded by users.

Danny then raised the privacy question with street-level photography.

John Hanke argued that the genie is out of the bottle and this imagery is here to stay.

Blaise cited differing privacy laws in various countries and argued that some of them didn’t make sense. Everyone agreed with the “face blurring” that’s going on however.

On how mobile is changing local:

Tom Wailes asserted that it’s “fairly obvious how it’s changing local — convenience.” He argued that “Simpler local tasks are migrating aggressively to mobile.”

Dylan Swift discussed the immediacy of the user need in mobile — “tell me what’s good within 10 feet of where I’m standing right now” — and discussed the Yelp Monocle augmented reality tool.

Blaise: “Mobile is local; it’s really hard to draw the distinction. On the PC one could argue that maps is a vertical. On the mobile device maps isn’t a vertical. The entire context for everything that I do is about me and my location . . . often on foot.” He added that “spatial accuracy is very important.”

Hanke said he was “fascinated by mobile-local-social dynamics” and cited Foursquare as a exemplar of that development. “We’ve only begun the potential there.” Mobile and local “are wedded” at this point.

Danny then asked provocatively, “Will you be overtaken by the new check-in services?”

Dylan Swift jumped in, “Check-ins are a feature.” He said they “tie in nicely with the CRM aspects of our site.” Check-ins help local businesses see who their most loyal customers are.

Blaise: “We see ourselves as an ecosystem player; I get excited not distraught by what I’m seeing. I’m a big fan of Foursquare.”

Tom Wailes: “I’m very excited seeing these check in players. It’s very early too.” He said it’s hard to predict when and if the phenomenon will migrate to a mass audience. He said that Yahoo was a potential partner, rather than being threatened. He explained that Yahoo research has shown “Average users aren’t aware of this stuff yet,” adding that it will be “interesting to see how this evolves as it gets adopted by a mass audience.”

Hanke agreed: “We’re excited to work with these companies . . . We want to build inventory of great locally relevant ads. Previously the inventory wasn’t there.” He discusses some of the new simple ad products for local businesses from Google.

Tom Wailes: “Even users who haven’t heard of these services, they like the functionality especially coupons/discounts.”

Finally local and social:

Dylan Swift: “We’re at the early stages. This [local] is an obvious place for collaborative filtering to help get the most relevant recommendations to you.”

Blaise: “I want help to find where people like me go to eat. I wouldn’t trust any algorithm to know what I like; neither would I trust reviews in their current form.”

Tom Wailes: “Social and local . . . It’s about how to connect people to those who they can trust.”

Hanke: “Social is really important; there’s going to be more from Google on social and local.” He added that there’s a need to make features and functionality simple. “Most features are used by less than 5 percent of our users and we wind up throwing them away. We need more innovation around simple UIs coupled with great data.”

If that sounds familiar you are one of the growing number of people using/playing Foursquare, a mobile app that uses the location of your mobile device to encourage users to “check in” wherever they might be in exchange for points and recognition like becoming the Mayor of McDonald’s, or wherever else you might happen to be. Yelp recently launched a similar feature and GoWalla provides its own spin on this conceit. So more people are checking out checking in. You might wonder, what does all this have to do with local search?

There’s this thing called Second Life. It’s been around for a while and every year hundreds of thousands of people sign up to create virtual selves that interact in virtual worlds with other virtual people and use virtual money to buy virtual goods. That virtual money is of course paid for with non-virtual (aka real) money. So what if instead of experiencing Second Life on your computer, you could experience it in the real world? That’s the promise of these new location-based gaming applications—overlaying a virtual world upon the real, physical 3D world.

Besides amassing points and badges, the benefit of using these check-in services is that they can present relevant nearby offers and promotions to users. If you are at a mall and you check in to a Gap store you might get an offer for a discount on a shirt. If it’s around lunch time you might get pinged about a discount meal offer at a nearby California Pizza Kitchen along with a review of the pizza by a friend who is using the same app. The relevance of location, time, social recommendations and perhaps demographic information combine to make powerful media targeting.

We are now in what I call the 2D version of location-based gaming. There’s not a lot more to it than what’s described above. But in the not-too-distant future I believe we will see a James Cameron of local search emerge and create the 3D version that will rock the world.

Imagine a game that happens via a mobile device but incorporates real world location. Now imagine that instead of merely checking in and getting relevant coupons, you are actually playing a game that requires you to interact with the location and the people there. Maybe the game requires you to go to a McDonald’s (Burger King underbid for the QSR sponsorship) and order a specific item to unlock some secret. The guy at the counter pings your mobile device once the sale is made and then you are given a message to sit at the table near the ketchup counter to await your next instruction—and enjoy the Filet O’ Fish while you wait. Then another player sits down, gives you the secret handshake and provides you with your next mission, to find another clue to the game while trying on a new Wonderbra at Victoria’s Secret (warning: gender targeting can sometimes be off. We’re still in beta after all).

What if the world basically becomes a walking version of the Wii?

The implication for brands is pretty clear. There will be opportunities to interact with potential customers by integrating with the game. This is no different than what is going on in virtual worlds like Second Life. The difference is that the interaction will be happening both online and offline simultaneously and it will likely be accessible to a lot more people.

So what does this mean for the service providers who are not location-based (e.g. plumbers) and those who are not ideal hosts for fake shoot outs (e.g. banks, gynecologists, etc.)?

In the 24/7 always on world of reality-based virtual gaming, there will always be an excess of inventory. As these types of experiences become the new time suck, most likely for a younger demographic, creative local businesses will find a way to get their message out. At first this will be the realm of two-for-one shots at the local bar type deals. But just like ATMs found their way into casinos, clever banks, chiropractors and others will find ways to participate if the customers are there. Don’t be surprised if the next time you are named the Mayor of the local dive bar you get a friend connection request from a virtual DUI attorney.

Partners during the pilot phase included Digsby and UberTwitter, among others, while advertisers included sports networks, news organizations, and entertainment sites. Here’s an example of ads from the program being shown in OneRiot’s feed, tied to the “Conan O’Brien” trending topic:

OneRiot says the RiotWise ads have been performing at 3-4 times industry standard CTR for ads in realtime web apps. Says OneRiot GM Tobias Peggs: “Our ads make sense to buyers, make sense to users, and transparently deliver revenue to developers across the realtime web ecosystem.”

Today’s launch makes RiotWise available to all developers via the OneRiot Developer Network.

Early days of mobile advertising

Before smart phones hit the market, mobile advertisers were confined to the small screens of traditional mobile units. Web access on those phones was painful and expensive“web pages” on those phones often consisted of nothing more than several hyperlinks. Needless to say, the technology never really took off. The iPhone changed all of that in late 2007, by offering a full touch screen HTML browser. Suddenly web-on-mobile devices started to make more sense for both phone users and advertisers.

AdWords and mobile

Soon after the iPhone launch, Google introduced a new feature in the AdWords “Settings” tab. This feature enabled online advertisers to syndicate AdWords ads to mobile phones. With the flip of a switch, online ads could be displayed on browser-based handsets around the world.

Sounds great, right? In theory yes, allowing online advertisers to syndicate pre-existing ads to users on a new type of device with little-to-no work sounds great. Except that these ads were originally designed for users accessing the web from a relatively fixed location on a screen ranging in size from 10 to 20+ inches.

Why does this matter? Users accessing the Internet via PC (laptop or desktop) are in a totally different mindset from their mobile counterparts. Generally, PC users will spend large chunks of time in a fixed location and may spend hours searching and researching.

The PC experience is much more tolerable, searching from the comforts of your home or office is much more enjoyable than trying to navigate a 2-4 inch touch screen while walking down a busy street or riding on a bus.

Additionally, PC users have more time on their hands—when you are on the go you probably have a task to accomplish and you are usually in transit. Mobile users “snack” on the internet in small browsing sessions, and generally access the web when they need a quick answer.

Now you can start to imagine why ads that you have strategically set up with PC users in mind may not be as effective in AdWords’ mobile version.

AdWords mobile optimization techniques

1. Turn off your mobile ad syndication if you haven’t done so already. You will turn it back on when you are ready.

2. Make a copy of your AdWords campaign and append the word “mobile” or another designation to differentiate the new mobile campaign from the standard campaign.

3. Adjust your bids to a lower value. At this point, few advertisers have enough data to clearly suggest how effective mobile ads are versus their traditional AdWords counterparts. Additionally, few advertisers are opted in to the AdWords mobile option. Why risk a higher CPC if you don’t have to?

4. Review your ads. You want to ensure that your ads are clear and to the point. Remember, most mobile users are accessing the web on 2-4 inch screens. The goals of these ads should be relatively similar to those of your traditional AdWords ads. However, there may also be additional opportunities for geo-modification due to enhanced targeting capabilities of mobile devices. Also, be sure to take advantage of Google’s new in-ad phone feature. This will allow users to call your business directly from the SERPs for the price of a standard click.

5. Review your landing pages and optimize them to be more mobile friendly:

• Remove non-essential images; these take up space.
• Be sure to include your phone number. Many smart phones have a tap-to-call technology built in that will allow your visitors to call your company directly with a simple touch of the screen.
• Use contrasting colors and simple fonts. A clean design is even more important on mobile devices.
• Organize your content in short lists, and bold important terms if possible.

6. Review your current keywords. Certain keywords may work better than others in the mobile space and testing will reveal their value.

7. Revisit your goals and manage your expectations. Mobile advertising is a great way to stay connected to your audience when they are away from their PC. Reduced expectations for your mobile campaigns should be set as users will be less likely to make a purchase on a mobile device. Lower CPCs should help offset the difference in conversions.

Calls to Action to consider monitoring:

• Direct calls to your business
• Clickthroughs to specific links
• Sharing features (email a friend, tweeting, SMS sharing)

8. Test and monitor your campaigns on an ongoing basis, just as you would with any AdWords campaign. As more consumers switch to smart phones and our lives become increasingly mobile, expect online advertising to follow suit.

With more people using advanced devices and with advancements in mobile technology, opportunities to market to mobile users will increase as well. I’m not suggesting that mobile advertising will become a staple in every advertiser’s marketing mix in 2010, but if you don’t test the new advertising opportunities your business might be missing out. Before launching your first AdWords mobile campaign adhere to the best practices listed above to minimize your risks and increase your ability to control your campaigns.

• What mobile channels are available to search marketers and which show the most promise?
• What are the prospects for search, particularly local search, on mobile devices, and how is the landscape changing?
• What steps can marketers take to effectively target and reach consumers using mobile?

The report generally advises:

• Create usable content designed around the specific wants, needs, and usage patterns of mobile consumers.
• Redirect users to that content via SEO and paid search efforts calibrated to the smaller screen real estate available on mobile devices.
• Location, location, location: remember that mobile is about location, specifically where the mobile user is at any given moment.  Take into account  the specific behaviors and needs that accompany on-the-go Internet access when crafting advertising messages.
• Brands that value their site stickiness and hard-earned search equity should create versions of their desktop Web content synthesized specifically for the wants and needs of the mobile user.
• Marketers need to segment the market by demographics and mobile device traffic.  Mobile is not a one-size-fits-all proposition.

Overall it’s a very helpful primer on mobile marketing and search marketing to mobile device users, for those just starting to think about it. The report provides concrete best practices advice, identifies challenges and differences between mobile and PC SEO and paid search. It also segments the audience by device and demographics.

Earlier this year, SEMPO released its annual findings on the State of Search Marketing, based on data collected in December, 2008. It found that just under half of survey respondents were interested in mobile search marketing. There was also a mixed picture in terms of location targeting on mobile devices. I suspect these numbers would be much higher just nine months later.

At SMX East there will be several panels directly or indirectly addressing mobile, with one directly about mobile search marketing.

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