Yahoo and Google see new model in ad partnership

NEW YORK/SAN FRANCISCO (Reuters) - A partnership between archrivals Google Inc (GOOG.O) and Yahoo Inc (YHOO.O) to sell search advertising could expand over time, though some experts wonder whether Yahoo hasn't handed over its own house keys in the deal.

In announcing the agreement on Thursday, Yahoo and Google executives described it as a new, more open model for selling online advertising even while they remain competitors. They said that other industries have built islands of cooperation in some markets while vying for revenue in others.

"This deal in many ways reflects an emerging and new structure for the industry," Google Chief Executive Eric Schmidt said on a conference call. "Certainly we'd like to do more business with Yahoo over time."

Under the agreement, Yahoo can run ads supplied by Google alongside its own search results and on some of its websites in the United States and Canada. Each placement will be a mini-auction run by Yahoo in which Yahoo and Google bid to sell the ad.

Schmidt also said he would consider expanding the agreement overseas, but expects the current deal in North America would be "very successful."

At the heart of the deal is Yahoo's effort to remain in control of its business after sidestepping a $47.5 billion buyout attempt by Microsoft Corp.

Just hours before unveiling the Google partnership, Yahoo said talks with Microsoft over a proposal to buy its search business had failed. But some analysts question whether Yahoo hasn't tacitly given up its own claim to search.

"Google basically just got a great way to make money off its chief competitor," said Forrester's Shar VanBoskirk. "The grander strategic question for me is why turn down one competitor and let your other, bigger competitor actually into your house so they have visibility into what you are doing?"

Others said Yahoo must be getting a greater cut of the advertising split with Google, possibly as high as 65 percent to 95 percent. Google has similar deals with Time Warner Inc's (TWX.N) AOL and IAC/InterActiveCorp's (IACI.O) Ask.com.

"There is very little economic flow through to Google, there is just competitive positioning" against Microsoft, said Canaccord Adams analyst Colin Gillis.

RIDING BICYCLES

What stood out as Yahoo and Google separately outlined their strategies with analysts was the accord created between the two in talks that began in February, shortly after Microsoft made its offer for Yahoo public.

Schmidt described holding "entertaining" meetings with Yahoo CEO Jerry Yang and President Sue Decker in an empty Google building in a nearly unmarked location, with some of the executives riding bicycles to get there.

Larry Page, who founded Google with buddy Sergey Brin, said the two billionaires were moved to form the company by watching Yang and his Yahoo co-founder, David Filo, prosper before them.

Yang and Decker stressed Yahoo's capacity to pursue its own strategy, though they tipped their hat to Google's ability to "perform especially well" in some areas of search.

The amiable tone may not satisfy investors already suing Yahoo over its handling of talks with Microsoft, or stem a proxy battle being waged by billionaire Carl Icahn.

Yahoo said it expects the Google deal to generate an additional $250 million to $450 million operating cash flow within its first year.

Sanford C. Bernstein analyst Jeffrey Lindsay said that could add as much as $5 per share to Yahoo's value, which he currently pegs at $25 per share.

But that still falls short of the $33 per share Microsoft had last offered for a complete buyout. Sources close to the talks said Microsoft had more recently offered to pay $35 per share for a 16 percent stake in Yahoo.

"The way investors look at it, even if (the Google deal) was the same value, Microsoft's offer was cash in hand," Lindsay said. "It still doesn't seem to us to be as good as Microsoft's offer."

(Additional reporting by Daisuke Wakabayashi in Seattle and Anupreeta Das in San Francisco; Editing by Gary Hill)