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Yahoo, Google Partner On Ads, IM

Yahoo will display Google ads alongside some search results on its Web properties, and the two will work to make their instant messaging networks interoperable.

After stating on Thursday that it is no longer entertaining overtures from Microsoft, Yahoo revealed that it's partnering with Google.

Google said that it has signed a nonexclusive deal to display its AdSense for Search and AdSense for Content ads on Yahoo's U.S. and Canadian Web properties. The arrangement gives Yahoo the option to display Google ads alongside Yahoo search results, on its Web properties and on the sites of its publishing partners.

"This commercial agreement provides Yahoo with the opportunity to deliver more relevant ads to users and provide advertisers and publishers with better advertising technology to help them succeed in their own businesses," said Google CEO and chairman Eric Schmidt in a statement. "This agreement will preserve the competitive and dynamic online advertising space."

The deal also includes a commitment to make the two companies' instant messaging networks interoperable.

"I believe [the Google-Yahoo deal] puts Yahoo on a faster track to creating value," Yahoo CEO Executive Jerry Yang said to investors on a conference call on Thursday afternoon. Yang said the same thing on Yahoo's blog.

Yahoo expects the deal to generate between $250 million and $450 million in incremental cash flow during its first year. The company estimates that the deal represents an $800 million annual revenue opportunity.

"I wanted to put this arrangement in perspective and comment on what it is and what it isn't," Yang wrote in his blog post about the deal. "First, it does not signal that Yahoo plans to exit paid search. Quite the contrary. Through the financial benefits of better monetizing our search traffic, we'll be investing in search services and ad platforms, including Panama. An independent search business is critical to our future. We will retain complete flexibility and will call the shots on where and how often Google ads will appear. While Google has better advertiser coverage in some query areas, we still have the ability to provide Panama ads where they are most valuable."

Panama is Yahoo's name for its search advertising platform. Delays in the deployment of Panama contributed to Yahoo's inability to deliver ads as profitably as Google.

The success or failure of Yahoo's arrangement with Google is likely to determine whether Jerry Yang retains stewardship of the company he co-founded. News of the departure of three prominent Yahoo executives this week -- Jeff Weiner, executive VP of Yahoo's network division; Usama Fayyad, Yahoo's chief data officer and executive VP of research; and software engineer Jeremy Zawodny -- underscores the challenge Yang faces.

Executives from both Yahoo and Google stressed that the deal would promote competition. That competition is likely to be most apparent in mobile search and display advertising efforts, given that the deal covers advertising on the Web. Both Google and Yahoo see significant upside potential in advertising on mobile devices.

"The truth is, this kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition," said Omid Kordestani, Google's senior VP of global sales and business development, in a blog post. "Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market. Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users."

The reason for this is clear. As Kordestani acknowledged, Google and Yahoo have been in contact with regulators and will have to address their concerns about the deal. The companies have agreed to delay implementing the deal for three and a half months to allow the U.S. Department of Justice time to scrutinize the deal. The arrangement could last as long as 10 years: There's an initial term of four years and two three-year extensions are possible, at Yahoo's discretion.

Nonetheless, the chairman of a U.S. Senate antitrust subcommittee said on Thursday lawmakers would "closely examine" the collaboration between Google and Yahoo, Reuters reported. Democratic Sen. Herb Kohl of Wisconsin said the deal between Google and Yahoo "raises important competition concerns."

"The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee," Kohl said in a statement.

But antitrust lawyers said the deal would probably not meet trouble with antitrust authorities.

Reuters quoted antitrust lawyer Stephen Axinn, of the firm Axinn, Veltrop & Harkrider LLP, as saying: "I can't visualize this being a problem. It seems to me not to be an anti-competitive contract on its face."

The main question antitrust officials will look at, Axinn said, is whether the arrangement would lock out competitors or eliminate competition. "And I don't think it does either one," he said.

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