Straight from the horse's mouth:

We’ve started testing organic (also referred to as algorithmic) and paid search listings from Microsoft for up to 25 percent of Yahoo! Search traffic in the U.S. The primary change for these tests is that the listings are coming from Microsoft. However, the overall page should look the same as the Yahoo! Search you’re used to – with rich content and unique tools and features from Yahoo!. If you happen to fall into our tests, you might also notice some differences in how we’re displaying select search results due to a variety of product configurations we are testing.

If you haven't given Bing much attention now would be a great time to review your Bing SEO strategy.

Imagine selling web traffic as a commodity in a blind auction, while touting its value based on the traffic being targeted, relevant, precise, and trackable. Then imagine taking away the default keyword tool on the internet that has been written about in thousands of marketing books, ebooks, and web pages - and replacing it with nothing. Then imagine signing up some seedy publishing partners that run clickbots against your highest value keywords, and giving them the lion's share of the click "value" on those keywords. Then imagine not making it easy for advertisers to opt out of that "traffic." Then imagine editing your advertisers accounts without their permission to alter ad text and keywords, and only informing some of them about the changes sometime after they take place...with 1 in 5 rejecting the changes!

So inefficient and sloppy. They can call that account optimization, but only in an Orwellian sense. Why not give advertisers the tools to do optimization themselves?

Google offers about a half-dozen public keyword tools, makes it easy to filter out bad traffic, has way more volume, offers enterprise level analytics for free, and does not edit your keywords and ad copy against your permission. Is it any wonder Yahoo! managed to lose hundreds of millions of dollars last quarter, while Google keeps exceeding market expectations - even during a recession?

I just hope that when Yahoo! gets bought out by Microsoft that they keep Site Explorer around for us SEOs, and don't do us as poorly as they did their advertisers. ;)

[update: Danny Sullivan also covered this issue.]

The WSJ reported that Google and Yahoo! have inked a non-exclusive ad deal

Yahoo said it will display some ads sold by Google in an agreement estimated to generate $800 million in annual revenue. In the first 12 months following implementation, Yahoo expects the deal to generate an estimated $250 million to $450 million in incremental operating cash flow.

Both companies have agreed to "delay implementing the deal for up to three and a half months while regulators review it." The deal can be terminated at any point in time, but if it is terminated within 24 months Yahoo! will owe Google $250 million.

The partnership is only for the US and Canadian markets, but expands beyond Yahoo!'s search results into Yahoo! content ads and even the syndicated Yahoo! Publisher Network. Given Yahoo!'s poor ad relevancy and that they are reselling Google ads, how will the Yahoo! Publisher Network ever gain marketshare from AdSense?

Beyond the incremental revenue stream, this also gives Google another opportunity to spy on web users who use their largest competitor - allowing Google to get a better view of the average web user and making it easier for Google to clone and beat Yahoo! in any market where Yahoo! leads.

Here is Google's take, and the full Yahoo! press release is below

Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With Google
Thursday June 12, 6:16 pm ET

Agreement Advances Yahoo!'s Open Strategy; Enhances Ability to Compete in Converging Search and Display Marketplace

SUNNYVALE, Calif.--(BUSINESS WIRE)--Yahoo! Inc. (Nasdaq:YHOO), a leading global Internet company, announced today that it 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.

Under the terms of the agreement, Yahoo! will select the search term queries for which – and the pages on which – Yahoo! may offer Google paid search results. Yahoo! will define its users’ experience and will determine the number and placement of the results provided by Google and the mix of paid results provided by Panama, Google or other providers. The agreement applies to paid search and content match and does not apply to algorithmic search. The agreement also applies to current partners in Yahoo’s publisher network.

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.”

“This agreement provides a source of funds to both deliver financial value to stockholders from search monetization and to invest in our broader strategy to transform display advertising and advance our starting point objectives with users,” said Yahoo! President Sue Decker. “It enhances competition by promoting our ability to compete in the marketplace where we are especially well positioned: in the convergence of search and display.”

Agreement Provides Attractive Economics and Enhances Search Monetization

Yahoo! believes that this agreement will enable the Company to better monetize Yahoo!’s search inventory in the United States and Canada. At current monetization rates, this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow.

The agreement will enhance Yahoo!’s ability to achieve its goal to grow operating cash flow significantly, while at the same time providing flexibility to continue to invest in ongoing initiatives such as algorithmic search innovation and search and display advertising platforms. It gives Yahoo! complete flexibility to continue to use its Panama paid search results.

Significant Benefits Will Flow to Users, Advertisers, Publishers and Employees

Users will also benefit from Yahoo!’s ability to invest incremental operating cash flow in ongoing improvements to its search services, building upon recent major innovations such as Search Assist and SearchMonkey. Advertisers will continue to benefit from multiple marketplace alternatives including Panama, Google and others. Publishers will benefit from a winning combination of distribution, monetization and services to help them grow their businesses. The financial benefits will enable Yahoo! to broaden the scope of its investments and initiatives, enhancing Yahoo!’s ability to offer attractive career opportunities to its employees.

Terms of the Agreement

The agreement will enable Yahoo! to run ads supplied by Google's AdSense™ for Search and AdSense™ for Content services next to Yahoo!’s internally generated paid search and algorithmic search results. Yahoo may also run Google-supplied ads on non-search Yahoo web properties, as well as on current members of its partner network. The agreement has a term of up to ten years: a four-year initial term and two, three-year renewals at Yahoo!’s option. It applies to Yahoo!’s operations in the U.S. and Canada only. Advertisers will continue to pay Yahoo! directly for clicks served by Yahoo! from Yahoo!’s Panama and Content Match marketplaces. Advertisers will pay Google directly for each click on Google paid search results appearing on Yahoo! owned and operated network or certain affiliate sites. Google will share a percentage of such revenue with Yahoo!.

In addition, Yahoo! and Google agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users.

The agreement allows either party to terminate the agreement in the event of a change in control of either party. The agreement also requires Yahoo! to pay a termination fee if the agreement is terminated as a result of a change in control that occurs within 24 months. The termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement.

Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.

Goldman, Sachs & Co., Lehman Brothers and Moelis & Company are acting as financial advisors to Yahoo!. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to Yahoo!, and Munger Tolles & Olson LLP is acting as counsel to the outside directors of Yahoo!.

Yahoo! will host a conference call to discuss the agreement with Google at 6:30 p.m. Eastern Time today. To listen to the call live, please dial 877-391-6847 (reservation number 70308474#). A live audiocast of the conference call can be accessed through the Company's Investor Relations website at http://yhoo.client.shareholder.com/index.cfm. In addition, an archive of the audiocast can be accessed through the same link. An audio replay of the call will be available following the conference call by calling 888-286-8010 (reservation number 84138579).

Since buying out Yahoo! seemed too expensive, Microsoft is back again with another offer. Microsoft's Statement:

In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

There of course can be no assurance that any transaction will result from these discussions.

From AllThingsD:

The software giant would not give details, but sources at both companies said it involved Microsoft buying Yahoo’s search business and the ad business related to text-based ads.

Kevin Johnson also posted an internal Microsoft memo on News.com.

Microsoft decided to walk on the Yahoo! deal. After the sharp Yahoo! stock decline Monday, expect many shareholder lawsuits. The press release contained the following open letter to Jerry Yang.

Dear Jerry:
After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!'s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

Also, after giving this week's conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a "hostile" bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

• First, it would fundamentally undermine Yahoo!'s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.
• Given this, it would impair Yahoo's ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.
• In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.
• This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.
• It could foreclose any chance of a combination with any other search provider that is not already relying on Google's search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft's proposal to acquire Yahoo!.

We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.

I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

But clearly a deal is not to be.

Thank you again for the time we have spent together discussing this.

Sincerely yours,
/s/ Steven A. Ballmer

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation

Any guess as to Yahoo!'s closing share price Moday? Vote on this poll and guess below. If you are the first person to guess within a dime you get a free month of access to our online SEO training program.

The short term upside for search marketers is that this lowers the odds of Yahoo! gutting itself by outsourcing paid search to Google.