Microhoo Deal Is Here!

After weeks of feverish rumors and months of the most tortured negotiations since the RJR Nabisco takeover, Microsoft (MSFT) and Yahoo (YHOO) announced a new partnership this morning, one that will present the greatest challenge Google (GOOG) has ever faced in the search and advertising market.

Readers will surely recall that last year Microsoft got the ball rolling with a hostile proposal to buy Yahoo, a deal that ultimately reached more than $47 billion but was vigorously opposed by then-CEO Jerry Yang. Months later, after a collapse in Yahoo's stock price, Yang was out and Carol Bartz was in, and the talks started up again. Now a different 10-year partnership has emerged.

Under the terms of the deal, Yahoo's searches will be powered by Bing, the new, impressive search engine debuted by Microsoft in June. The two companies will split advertising duties; Yahoo will handle the major accounts, in which big advertisers directly negotiate rates, while Microsoft's automated auction system will handle the smaller ad accounts.

It's a reasonably nice deal for Yahoo, which doesn't have to worry about its search technology anymore but initially gets to rake in 88 percent of ad revenue from searches conducted on its portals. But as the New York Times points out, Microsoft has a lot to gain from this as well. No matter how powerful and useful Bing is, Microsoft's share of the search market is just a little more than 8 percent, which leaves advertisers wondering if Bing can really deliver the customers they crave. With this one arrangement, Bing's share of the market jumps from 8 percent to 28 percent. Suddenly, Microsoft's a major player again.

"Although Yahoo and Microsoft will continue to be dwarfed by Google in search, the combination of the two companies creates a far more powerful counterweight to Google, one that will be welcomed by many in the advertising industry, who have watched Google rapidly become the world's largest seller of advertising with a mix of fascination and foreboding," writes Times reporter Steve Lohr.

Search Engine Land's guru Danny Sullivan has live-blogged this morning's announcement, and you can read his thoughts here. Meanwhile, here's Carol Bartz on the deal: