According to AllThingsD the MicroHoo search deal is nearing completion and “definitive agreement” status. Speculation that the deal was in trouble started happening when the two companies failed to meet their self-imposed October 27 deadline to finalize the complex agreement. However it appears the circumstances were just as reported in the parties’ 8-K filing with the US Securities & Exchange Commission:

The Letter Agreement specified that the parties would execute Definitive Agreements by October 27, 2009, but given the complex nature of the transaction, there remain some details to be finalized. The parties are working diligently on finalizing the agreements, have made good progress to date, and have agreed to execute the agreements as expeditiously as possible . . .

On the regulatory front AllThingsD reports that “several sources said, those government approvals are now nearing completion at the Justice Department, even though the Federal Trade Commission might still ask for more assurances on privacy issues related to online advertising and consumer data.” Europe must also approve the deal.

According to the most recent comScore search market share data, the combined reach of MicroHoo search would be 27.9% vs. Google’s 65.4%. Assuming the deal goes through up next for Microsoft would be a decision about whether to attempt to buy Ask, which IAC’s Barry Diller is open to selling, and whether to bid for AOL’s search-ad business when that deal comes up for renewal in 2010.

However a MicroHoo approval would potentially make a later Ask acquisition (or maybe even an AOL deal) harder because it would reduce the number of independent search engines in the market.

Yahoo reported today that the company had “entered into an exclusive, multi-year, partnership with O2 Germany to become the preferred partner for mobile search and services, displacing Google.” Paid search results are reportedly part of the deal (and likely a revenue share as well). According to press materials:

O2 users now have direct access to Yahoo!’s mobile-optimized search engine, which is specifically designed to provide quick and easily accessible answers for users on the go. Yahoo! most popular properties including Yahoo! Mail, News, Weather, Finance, Flickr, Eurosports and Soccer will also be integrated on O2’s mobile portals. Users also will be able to sync their PC and mobile homepages, proving one seamless Yahoo! experience.

Spanish-owned Telefonica, the corporate parent of mobile carrier O2, had a prior deal with Yahoo that covered Latin America and the UK but not Germany, where O2’s search partner was Google — until now. According to an IDG News article and interview with Yahoo Mobile Europe managing director Mitch Lazar, O2’s experience in the UK with Yahoo was persuasive in the decision to replace Google.

I got two calls yesterday from people asking what I made of the Yahoo-Microsoft failure to meet their self-imposed search-deal deadline (October 27). I said it was probably just a case of needing more time to work through some of the details rather than a warning sign that the entire deal was in jeopardy.

There’s much at stake for both companies (somewhat less for Bing) in having committed to this deal. The market would punish both if the deal were to fall apart. It would be very hard for Yahoo to recover in the short term, having lost some of its best search people (many of whom are now working for Microsoft). And Microsoft would lose the reach that Yahoo search provides. However, ironically, Bing may be taking share from Yahoo rather than Google if these recently released iCrossing numbers are right.

The companies filed a form 8-K with the US Securities & Exchange Commission extending the time for completing the details of the search deal they announced many months ago. Here’s the text of the filing:

On October 28, 2009, Yahoo! Inc., a Delaware corporation (“Yahoo!”), and Microsoft Corporation, a Washington corporation (“Microsoft”), mutually agreed to extend the period to negotiate and execute a Search and Advertising Services and Sales Agreement and a License Agreement (the “Definitive Agreements”) reflecting and supplementing the provisions of such agreements as set forth in annexes to their binding letter agreement dated July 29, 2009 (the “Letter Agreement”). The Letter Agreement specified that the parties would execute Definitive Agreements by October 27, 2009, but given the complex nature of the transaction, there remain some details to be finalized. The parties are working diligently on finalizing the agreements, have made good progress to date, and have agreed to execute the agreements as expeditiously as possible. The Letter Agreement was the subject of a Current Report on Form 8-K filed by Yahoo! on August 4, 2009.

The information in this report shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Yahoo! under the Securities Act of 1933, as amended, or the Exchange Act.

(emphasis added.)

For more on where Yahoo stands, see Danny’s coverage of Yahoo Analyst Day.

There’s more coverage on Techmeme.

One of the factors behind the US Justice Department’s (DOJ’s) objection to the now-defunct Google-Yahoo search ads deal, which was far less sweeping than the pending Yahoo-Bing/Microsoft deal, was the objection of the powerful advertising trade organization the Association of National Advertisers. Now, another advertising trade organization, the “4As,” or American Association of Advertising Agencies, has formally announced its support for the Yahoo-Microsoft search deal.

Below is the full text of the letter, which was signed by 4As President and CEO Nancy Hill, along with the heads of the four major advertising holding companies–Maurice Levy, Chairman and CEO, Publicis Groupe; Martin Sorrell, CEO, WPP; Michael I. Roth, Chairman and CEO, Interpubic Group of Companies; and John Wren, President and CEO, Omnicom Group:

Advertising is the fuel that powers the Internet. Most websites depend on online advertising to survive – it’s what allows them to offer consumers free content and services.

A very important form of online advertising is search advertising – the sponsored links that appear when a search engine answers a query. A healthy, competitive market for search and search advertising is crucial to the Internet’s future. We believe that Yahoo! and Microsoft’s proposal to combine their technologies and search platforms is good for advertisers, marketing services agencies, website publishers and consumers.

These benefits are too important to wait for. As leading members of the advertising and marketing services industry, we urge the Department of Justice to bring its antitrust review to a speedy conclusion. This proposal enhances competition, and should be allowed to take effect as soon as possible.

I’m sure there were plenty of discussions behind the scenes and this wasn’t simply a spontaneous expression of good will; just as there was much behind-the-scenes lobbying that resulted in objections to the earlier Google-Yahoo search ads deal. Regardless, this public pronouncement will have influence and make DOJ acceptance and approval of the Bing/Microsoft deal much more likely in my opinion.

Bloomberg is reporting this morning that the US Department of Justice has decided to look more closely at the MicroHoo search deal. Microsoft and Yahoo are to provide more information on their “ad pricing and product plans, a person familiar with the matter said.” This is not a surprise.

The companies must convince regulators that the deal will not harm competition or adversely affect SEM pricing. They must also do a similar dance in Europe, where a parallel process will take place. In the end, however, it’s likely the deal will be approved given broad US and EU concerns about Google’s market position and this deal as a possible counterweight to that dominance.

And in a CNBC interview Yahoo CEO Carol Bartz says she would have accepted the Microsoft takeover offer that then CEO Jerry Yang and the Yahoo board rejected. (That would have had a tougher time with regulators than the search-only deal now before them.) Bartz also asserted that Yahoo was still in the search business by controlling the search experience around Bing results.

Bartz also discussed many other aspects of Yahoo’s strategy and value to users. You can see the full interview below.

Those with BT broadband in the UK have noticed that the Yahoo/BT portal at bt.yahoo.com has a new search technology provider. You would guess that if Yahoo would replace their own search technology, it would be in exchange for Bing, in light of the recent news about the Bing & Yahoo deal. You would be wrong to think that because Google is now powering the search technology Yahoo/BT portal.

Here is a screen capture of the search box that now says, “Powered by Google,” taken from ConnectedInternet.co.uk, which tipped us to this:

I know the Yahoo and Microsoft deal has not been signed off on yet, but you have to admit, this is a bit comical?

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.

A report analyzing traffic and click-through rates from ad network Chikita finds that “Bing users are over 50% more likely to click an ad on your site than Google users.” What this means, according to the post, is those who arrive at third party sites via Bing click more frequently on ads on those sites than those coming through Google. TechCrunch offers a bit more detail and speculation about why this might be (i.e., “the law of large numbers”). According to Chikita, the respective click rates are:

• Google: .97 percent
• Yahoo: 1.24 percent
• Bing: 1.5 percent

Bing appears has made some incremental gains in search market share since its launch at the end of May. The two most recent roundups of the numbers are here and here. Even though Bing has been well received and has some momentum it doesn’t appear that will quickly translate into significant market share advances. For that reason Microsoft still needs Yahoo’s reach.

Turning to the seemingly perpetual subject of a search deal between Microsoft and Yahoo, AdAge is reporting that a deal, previously described as “imminent,” could be announced this week. The article says the payment structure was a sticking point and will be a revenue share rather than an upfront payment and revenue guarantees, which Yahoo had reportedly wanted:

Execs in Redmond never conceived of the deal as an upfront purchase of Yahoo’s search traffic but as a deal in which Yahoo would be compensated from a share of revenue from the sale of search ads. Yahoo would be allowed to sell search ads on Bing.com as well as its own site, giving it more search inventory to sell and making it a bigger player in the search sales front. It would also immediately be able to save millions by not having to maintain its own search infrastructure.

The latest terms of the deal underscore Microsoft’s devotion to developing and owning technology vs. selling media. The deal won’t make it a bigger seller of online advertising but it would allow it to eliminate a search-technology competitor in Yahoo and consolidate roughly 30% of the search marketplace on its own platform — a large enough share, CEO Steve Ballmer seems to believe, to dent Google’s dominance.

If the article is correct then Yahoo would retain the ability to sell search and display to its advertisers, but probably not through an integrated platform. Currently Yahoo sells search via Panama and display advertising through APT; however there was always discussion of integrating the platforms in the near term.

We’ll have to wait to see whether there’s a deal and what the terms are. Any such deal would have to pass muster with regulators before it could be implemented.

On that front, the NY Times ran an article this weekend describing internal conflict within the Obama administration about how aggressive to get with anti-trust policy and prosecutions. The US Department of Justice anti-trust chief Christine Varney, who has described Google previously as “a monopoly,” is apparently facing push-back in her quest to reign in some US corporations. How this internal debate plays out will affect scrutiny of potential deals such as Yahoo-Microsoft.