Microsoft and Yahoo 'reach ad deal'

Microsoft and Yahoo have reached an agreement on a search and advertising deal, with an announcement expected as soon as today, according to US media reports.

The deal, which follows Microsoft's unsuccessful bid to buy Yahoo's search business for $1bn (£610m) last year, is not thought to involve any upfront payment. Instead, as previous speculation had suggested, it will focus on a revenue-sharing deal between the two companies.

According to reports, Bing, Microsoft's newly launched search engine, will become Yahoo's default search service.

This will give the two companies a combined market share in the US search ad market of about 30%. Google would still be the dominant force with a share of around 65%.

For the first two years, Yahoo will keep 100% of the revenue plus an additional 10%, according US tech blog AllsThingsD, and 90% in the third year. The aim is that, from the fourth year of the deal, Microsoft will become the number two player in the US seach ad market.

A search ad deal between Google and Yahoo ran into huge opposition last year and ultimately failed to gain US regulatory approval. Microsoft and Yahoo are thought to expect some form of regulatory scrutiny from the Department of Justice.

Relations between Yahoo and Microsoft, which last year made an unsuccessful $47.5bn takeover bid, have warmed since January, when Yahoo co-founder Jerry Yang was replaced as chief executive by Carol Bartz.

The chief executive of Microsoft, Steven Ballmer, made it clear last month that the software giant was not interested in buying Yahoo but was very keen on other forms of partnership.