Google, Yahoo! Step Up Search-Deal Defense

For Yahoo!, the stakes in this deal are particularly high in light of recent events. The company ticked off a lot of investors after a proposed merger with Microsoft(MSFT Quote) collapsed this summer, resulting in a steep falloff in Yahoo!'s stock price that has yet to recover.

The deal with Google was meant to placate some of that anger. Yahoo! estimated the outsourced ads could generate $800 million in annual revenue and $250 million to $450 million in cash flow.

Yahoo! on its own has long struggled to compete with Google, with only 19.6% of the search market share compared with its rival's 63%, according to comScore. Even with a recent overhaul of its advertising platform, Yahoo!'s revenue growth has been considerably slower than Google's. And with advertising spending on the decline in a tough economic environment, it's hard to imagine Yahoo! closing the gap anytime soon.

Ned May, a lead analyst for Outsell, a market research firm, sees benefits for Yahoo! in partnering with Google. He points out that the revenue shared with Google through the outsourced ads will allow Yahoo! to inject money back into the company and improve its own technology.

And he disagrees that the search deal will hurt advertisers in the long term by damaging competition.

"Who would this really hurt? It's going to hurt Yahoo! if it doesn't go through and then the long-term implications are going to matter," May says.

But Bob Liodice, president of the Association of National Advertisers, says Yahoo! should be using the cash flow it has available right now to improve its technology and better compete with Google.