Yahoo and Microsoft strike fresh search partnership deal

Marissa Mayer, Yahoo's chief executive, is pushing deeper into web search, after shaking up the company's decade-long partnership with Microsoft's Bing.

For five years, Yahoo has been sending all search queries to Microsoft's search engine Bing for the actual search process, but it retained control over the advertising that appeared beside the results.

Under the revised deal, Yahoo is free to experiment with up to 49 per cent of its search traffic - and even possibly send some of it to Google instead of Bing - as Ms Mayer tries to reestablish Yahoo as a major player in the search engine market.

In return, Microsoft will take control of the advertising served next to the searches it does serve. The shift will force Microsoft to increase its search ad salesforce and enable it to build relationships with marketers to whom it could potentially cross sell other products.

The latest deal stopped short of transforming the financial structure of the deal, or abandoning it altogether, which some analysts had speculated Ms Mayer might want to do. The advertising revenue split between the two companies has never been made public.

Ms Mayer, a former Google employee who built her career around search, was disappointed with the previous deal and wanted more control over how the search product was designed. She can now use Yahoo's own technology or invent new tools that anticipate users' needs in different ways.

The changed deal could trigger a realignment among the leading search companies.

Yahoo first turned to Microsoft for a partnership only after its preferred option - a deal with Google - ran afoul of competition concerns from the Department of Justice. At the time, Yahoo handled 19 per cent of the internet searches in the US, while Microsoft's Bing handled only 9 per cent. Regulators at the time worried Bing would fail in the face of a Google-Yahoo combination.

Since then Bing's market share has jumped to 20 per cent while Yahoo's has fallen to 13 per cent. That has made the alliance less essential to Microsoft, which at the time needed more traffic to improve its algorithms and advertising revenues. The change in market share may also free Yahoo to reallocate part of its search traffic back to Google without provoking regulators.

Jeremy Kressman, an analyst at eMarketer, said Yahoo had won "significantly more favourable terms than when the alliance was first formed".

"The new agreement positions Yahoo to better monetise its own search traffic and put its own search ad products like Gemini front and centre," he said.

Ms Mayer said she had worked closely with Satya Nadella, the Microsoft chief executive, for months to renegotiate the deal. "This renewed agreement opens up significant opportunities in our partnership that I'm very excited to explore," she said.

Mr Nadella said the deal was an example of how Microsoft could cultivate partnerships to benefit shared customers.

Yahoo has already signed other deals, for example, becoming the primary search engine on Mozilla Firefox browsers and has said it intends to bid for a partnership with Apple's Safari browser to be the search engine for iPhones.

Microsoft had also been relying on Yahoo's advertising salesforce, which has had a rocky relationship with advertisers in the last couple of years, especially under Henrique de Castro, the former chief operating officer who Ms Mayer pushed out for underperformance in early 2014.

Ms Mayer, who joined in the summer of 2012, has been trying to pull several different levers to reverse a revenue decline at the company, including focusing on the growth areas of mobile, video, native advertising and social media. But total revenue still fell 1.3 per cent to $4.6bn last year. Yahoo's search business contributed 38 per cent of that revenue.

The negotiations come at the halfway point for the deal, after five years, and had been extended for another 30 days past the original deadline as the companies tried to reach a compromise.

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