Last Thursday, Yahoo! announced they will run ads supplied by Google alongside their search results. This agreement enables Yahoo! to display PPC Advertising results from Google, other third parties, and Yahoo!’s own Panama marketplace.  This is a fairly shocking development that appears unwelcome by Yahoo! Shareholders, as witnessed by the large drop in stock price late last week. Partnering with the enemy… can it really be, and is it wise? Is this the end of Yahoo! Search Marketing? PPC Advertising

Microsoft indicated they are no longer interested in an all-out Yahoo! buyout, but would still like to strike a more limited deal. Microsoft needs to do something if they want to compete in the search industry. Further complicating this high stakes chess match, Microsoft indicated that they were willing to offer $8 billion for a 16 percent stake in Yahoo! (at $35 per share) and $1 billion to buy Yahoo’s search business. This was rejected by Yahoo!, but certainly seems like an intriguing proposition.

Yahoo! instead opted to partner with Google, which will immediately increase income and reduce expenses. Though Yahoo! Investors would apparently prefer to see a Microsoft buyout, 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…”

So is Microsoft really going to let this happen? Not only have they failed to buy Yahoo!, but they have succeeded in strengthening their archrival. I suspect Microsoft may still make a play for Yahoo! yet.  In the meantime, Microsoft and others are pushing for the U.S. Justice Department and lawmakers to take a hard look at the arrangement to make sure it doesn’t give Google too much control over the PPC Advertising industry.

It looks like Google is the big winner here. Big big big winner.