Yesterday Yahoo said it had agreed to let Google put search ads — advertisements placed next to search results — on its site in what it called an $800 million annual revenue opportunity. This agreement would boost cash flow by $250 million to $450 million in the first 12 months.
Yahoo has reached an agreement with Google Inc. that will enhance its ability to compete in the converging search and display marketplace, advancing the company’s open strategy. The agreement enables Yahoo to run ads supplied by Google alongside Yahoo’s search results and on some of its web properties in the United States and Canada. The agreement is non-exclusive, giving Yahoo the ability to display paid search results from Google, other third parties, and Yahoo’s own Panama marketplace.

Yahoo! CEO and co-founder Jerry Yang said, "We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry. Our strategies are specifically designed to capitalize on this convergence — and this agreement helps us move them forward in a significant way. It also represents an important next step in our open strategy, building on the progress we have already made in advancing a more open marketplace."

The process is non-exclusive, meaning others could join in the bidding to place ads. The companies agreed to wait three and a half months for regulatory approval and to offer a way to end it if Yahoo is taken over.

Google Chief Executive Eric Schmidt said that the decision of showing ads is a Yahoo decision, not a Google decision. He likened the deal to ones in other industries where rivals find ways to cooperate even as they compete.

Yahoo rejected Microsoft’s latest proposal, which sources briefed on the subject said included an offer to buy 16 percent of Yahoo for $35 per share, plus to buy its search business. Yahoo simply said that an alternative Microsoft proposal to buy only its search business did not fit into its plan to grow search and display advertising.

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