Kara Swisher

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Before Yahoo-Microsoft Deal Terms Are Unveiled, Let's Go to the Videotape From the Last One

As BoomTown reported earlier today, Yahoo and Microsoft have struck a search and online advertising partnership that sources said will be announced tomorrow.

But it is eminently instructive to look at the deal that Microsoft had offered Yahoo almost exactly a year ago, which was rejected in favor of a competing bid by fellow Silicon Valley Web rival Google (GOOG).

The Yahoogle deal, of course, failed, after regulators looked askance at a partnership of the No. 1 and No. 2 search players.

The new deal between Yahoo (YHOO) and Microsoft (MSFT), according to sources, certainly seems a lot smaller than the one offered last June, although there might be a surprise yet to come.

But so far, according to sources, there will be no upfront payment to Yahoo, with the focus on a revenue share between the two companies, as had been expected after Yahoo CEO Carol Bartz said she was looking for “boatloads of money” in any deal with Microsoft.

That might not be as forthcoming, since sources also said Yahoo would still sell search ads on its sites and Microsoft’s too, although Microsoft’s AdCenter advertising sales technology will be underneath it.

Doing its own search ads means the cost savings to Yahoo will be less than previously estimated, but it also solves its longstanding issues about control of relationships with advertisers and also of consumer data.

This makes the deal much less significant than ones previously envisioned, which included Microsoft taking over both Yahoo’s search and its text-based search advertising businesses in exchange for large payments and guaranteed revenue.

As it is, according to those familiar with the deal, the software giant still is getting an important coup, since its Bing search technology will be used on Yahoo sites. And Yahoo will be able to focus and innovate better on its strengths, which are in advertising and content.

Whatever is unveiled, there might be goodies yet to come, some of which might be similar to what Yahoo was previously offered by Microsoft.

As I wrote in June 2008:

Well, according to people familiar with Microsoft’s thinking, the goody bag Yahoo turned down was considered by the company to be substantial.

It included, according to Microsoft sources:

  • A cash offer of $1 billion for all of Yahoo’s search assets, including its paid and algorithmic search. But Yahoo would also be allowed to innovate in new arenas, like visual search. (This low bid was, most agree, kind of a direct insult to Yahoo techies.)
  • A commercial deal to serve Yahoo’s search and search-ad business with a guaranteed economic return that was higher than what Yahoo currently earns with its Panama system.
  • An offer to buy up to $8 billion of Yahoo stock for $35 a share from investors like Carl Icahn and others.
  • A guarantee to allow Yahoo to keep all data collected from search and search ads, in order to help its display ad business.

Overall, sources said that Microsoft estimated that the deal would improve Yahoo’s operating income by $1 billion.

The smaller Google deal has a lot less in terms of bells and whistles, but allows Yahoo to keep its search business intact.

Microsoft sources say execs were stymied by Yahoo, which offered to sell the entire company to Microsoft up until three days ago.

But, as Yahoo has even said, Microsoft remained steadfast in its lack of interest in a bigger deal, after it walked away a month ago from its botched takeover attempt.

And it is still not interested, even with the pressure a Yahoo-Google partnership now presents.

“Yahoo might still dream of a big deal and hope they can win this game of chicken by doing this deal with Google,” said one person familiar with Microsoft’s thinking, about the possibility of Microsoft now making another offer. “But the big deal is done.”

Even if Yahoo’s stock declines even more precipitously? “It’s no longer a price issue with Microsoft,” said the source. “The company has moved on.”

The source, like many, predicted intense regulatory opposition to the Yahoo-Google hookup from the software giant now.

No kidding!

“It’s war,” said another source. War is a nice way of putting it.

After all that, it finally looks like it’s peace–the terms of which will likely be highly scrutinized in the days ahead.

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— David Pogue on why he’s joining Yahoo