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Originally published August 24, 2010 at 10:02 PM | Page modified August 25, 2010 at 10:34 AM

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Microsoft, Yahoo mesh search powers against Google

On Tuesday, Microsoft Bing began running all searches on Yahoo's websites in the U.S. and Canada.

Seattle Times technology reporter

After a two-year dance as drawn out as an elaborate bird courtship, Microsoft and Yahoo have finally combined their search powers to compete against Google.

On Tuesday, Microsoft began running all searches on Yahoo's websites in the U.S. and Canada. People using Yahoo search will see a small message at the bottom of the search-results page that says, "Powered by Bing."

While the two combined are still a distant second behind Google's 66 percent of the U.S. market in July, Microsoft's 11 percent and Yahoo's 17 percent will now represent a 28 percent chunk

Out of the 15.6 billion times a search button is clicked every month in the U.S., 4.4 billion will now go through Microsoft's Bing.

"We're obviously happy," said Adam Sohn, spokesman for the Microsoft Online Services division. "In the grand scheme of things, we're barely a year since the original deal announcement and we've deployed in the largest search country in the world."

Danny Sullivan, editor-in-chief of website SearchEngineLand.com, says the handover may be quiet, but it's still remarkable.

"It is significant for Microsoft because it instantly propels them into being the No. 2 search provider in the country. They have been No. 3 for so many years," Sullivan said. "This deal that they have wanted — to have market share — has come through for them."

The two companies still are working on combining the advertising for both search engines this year.

Running more searches will make Bing a better search engine, Sohn said.

"How the [search] algorithms get smarter is by watching billions and billions of queries," he said. For instance, when users search for "jaguar," and most people click on car rather than cat links, that helps Bing deliver more relevant results for future searches.

"The more scale you have, the more rapidly you can improve and you can run experiments," Sohn said.

On the advertising side, customers won't have to go to two different companies to buy search ads. The improved search results that come from higher search volume will also help Bing match customers with the most relevant advertisers, Sohn said.

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Although most Yahoo users probably will not notice the change, the handover marks a change for the Sunnyvale, Calif., pioneer in Internet search.

The path to this point has been tortuous. Over the years, Microsoft's Live Search engine had fallen far behind as Google ballooned into a giant.

In early 2008, Microsoft decided the answer was to buy Yahoo. After negotiations and grandstanding on both sides throughout 2008, Microsoft withdrew the offer, which at one point was worth as much as $47.5 billion.

A changeover in the Yahoo chief-executive seat from Jerry Yang to Carol Bartz sparked renewed conversations. Microsoft also invested in building a new search engine, Bing, and launched it in June 2009.

In July 2009, the two companies announced a partnership that could deliver the search clout Microsoft wanted.

Under the 10-year deal, Microsoft is licensing Yahoo search technology and hiring 400 engineers from Yahoo. Sohn said Microsoft has hired engineers here and in California, and it's still bringing people on.

The staff is working on integrating the two companies' ad platforms, from which the partnership will generate sales.

Microsoft's advertising platform, AdCenter, will serve ads to Yahoo and Bing users. Yahoo and Microsoft will handle their own display advertisers, who buy space for banner ads on each company's websites.

Yahoo will handle the largest search-advertising clients, which have dedicated sales people and account managers.

Under terms of the agreement, Yahoo will get 88 percent of search-advertising revenue for the first five years. Microsoft will guarantee a level of revenue for the first 18 months after search services in each country are integrated.

While Microsoft sounds optimistic that it will bring the partnership's advertising operations together this fall, it's willing to put it off until next year if it creates problems for advertisers during the holiday shopping season.

Under the deal, Yahoo expects to generate $500 million more in operating income annually and save $200 million in capital expenditures.

In an internal projection unintentionally released in 2009, Microsoft said it expects to lose money for the first two years — about $300 million total — then make $400 million per year after that. Microsoft also planned to spend $600 million to $700 million on transition costs, and about $200 million of that was to to be invested in 2010. Microsoft declined to comment on those numbers.

Even while Microsoft and Yahoo continue working on integrating international markets, Yahoo Japan has said it wants to use Google's search engine and ad platform. Microsoft is arguing before Japanese regulators that the partnership would harm competition.

Microsoft stock fared slightly better than the rest of the market Tuesday. Microsoft shares fell 1 percent to $24.04. Yahoo fell 1.8 percent to $13.40. The Dow Jones industrial average lost 1.3 percent and the Nasdaq composite index fell 1.7 percent.

Sharon Pian Chan: 206-464-2958 or schan@seattletimes.com

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