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It’s been a rocky road, but Microsoft and Yahoo have finally come to terms on an Internet-search partnership. The 10-year deal will help stabilize Yahoo while giving Microsoft a better chance of building a successful Web advertising business to rival that of its newest nemesis, Google.

Under the terms of the deal, Yahoo will use Microsoft’s revamped search engine Bing on all its websites. Yahoo will also license its own search technology to Microsoft, to incorporate in Microsoft products if it chooses. In return, Yahoo will handle advertising for both companies and will receive a whopping 88 percent of search revenue over the first five years.

Once combined, Microsoft and Yahoo will have a 28 percent share of the search market. This only slightly narrows the gap with Google, which still dominates with two-thirds of the market. But the deal will help Microsoft gain ground on Google in other ways.

In the short term, Microsoft will instantly grab a much bigger audience for Bing. This will attract more Web advertising and should help the company’s engineers further refine the search engine’s underlying technology.

Over the longer term, it’s an important strategic maneuver for Microsoft as a business. As more and more key pieces of software move online, as well as the operating system itself, Microsoft is faced with a steady erosion of its traditional sources of revenue–licenses from companies and individuals. So it’s vital for the company’s future to build a lucrative business on the same foundation as Google.

What it all means for Yahoo is much less clear. The company will obviously gain short-term financial stability, but it risks becoming less relevant as an Internet business.

Most worrying for Google, perhaps, is the fact that recently Bing has been getting very positive reviews. Not only that, but a recent study from online advertising company Chitika claimed that Bing users are 55 percent more likely than Google users to click on advertisements after reaching a site. If that’s true, it could help lure more Web advertisers away from Google and over to Bing.

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Tagged: Business, Google, Microsoft, search, advertising, Yahoo, Web advertising

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