Microsoft HQ

Microsoft and Yahoo have signed a search deal, under which Microsoft Bing will power the Yahoo search site, and Yahoo will sell premium search advertising services for both companies.

Today's deal has echos of the deal between Yahoo and Google, which ended in 2004. Search on the Yahoo site at the time used Google and was clearly labelled as Google on the Yahoo site.

The deal follows the unsolicited bid by Microsoft to buy Yahoo last February. Together both companies hope to gain internet leverage against search giant Google.

Under the terms of the agreement, Microsoft will acquire an exclusive 10 year licence to the Yahoo core search technologies, and Microsoft will have the ability to integrate Yahoo search technologies into its existing web search platforms.

Each company will maintain its own separate display advertising business and sales force.

The financial terms of the deal were not disclosed, however Microsoft will compensate Yahoo through a revenue sharing agreement on traffic generated on the Yahoo network of both owned and operated (O&O) and affiliate sites.

The two companies said in a statement that Microsoft will pay traffic acquisition costs to Yahoo at an initial rate of 88 per cent of search revenue generated on the Yahoo O&O sites during the first five years of the agreement. Yahoo will continue to syndicate its existing search affiliate partnerships.

Yahoo estimates the agreement will provide approximately $500 million to its operating income of and capital expenditure savings of approximately $200 million within two years, based on current levels of revenue and current operating expenses. Yahoo also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

"This agreement comes with boatloads of value for Yahoo, our users, and the industry. And I believe it establishes the foundation for a new era of Internet innovation and development," said Yahoo! CEO Carol Bartz.

"Users will continue to experience search as a vital part of their Yahoo experiences and will enjoy increased innovation thanks to the scale and resources this deal provides. Advertisers will also benefit from scale and enjoy greater ease of use and efficiencies working with a single platform and sales team for premium advertisers. Finally, this deal will help us increase our investments in priority areas in winning audience properties, display advertising capabilities, and mobile experiences."

Microsoft CEO Steve Ballmer said: "Success in search requires both innovation and scale. With our new Bing search platform, we've created breakthrough innovation and features. This agreement with Yahoo will provide the scale we need to deliver even more rapid advances in relevancy and usefulness. Microsoft and Yahoo know there's so much more that search could be. This agreement gives us the scale and resources to create the future of search." Peter Sayer contributed to this report