April 13, 2009

In a development that can't be too surprising but may revamp the Internet landscape, Yahoo (YHOO) Chief Executive Carol Bartz and Microsoft (MSFT) CEO Steve Ballmer have started talking about forging Internet search and advertising deals.

First reported by Kara Swisher in a post on the AllThingsD blog Boomtown on the morning of Apr. 10, the talks are at an early stage. They include "many scenarios, such as one in which the companies swap online advertising assets and deliver services to each other," Swisher wrote. Yahoo "might take over all of Microsoft's display and premium advertising business to sell along with its own, while Microsoft would run the search advertising business for the pair."

One source close to the situation said the talks are preliminary. They don't involve Microsoft buying Yahoo outright. Neither is a simple outsourcing of Yahoo's search to Microsoft likely, because Yahoo under Bartz has made it clear the company considers its search business, which trails far behind Google's (GOOG) but is far ahead of Microsoft's, a valuable asset it wouldn't easily part with.

Microsoft has repeatedly indicated in recent months that it's still interested in a search deal with Yahoo. But the appointment of Bartz as the new Yahoo CEO in January, replacing co-founder Jerry Yang, effectively put further discussions on hold while Bartz found her footing.

It's believed that any deal Bartz would agree to would have to allow Yahoo continued access to data on Yahoo searches. That data is exceedingly valuable for mining buying intentions. Yahoo aims to use search data to help it more precisely target pictorial display ads, its mainstay business, to the most likely prospective customers. Such targeting is a key way Yahoo and others hope to boost display-ad rates, which have seen precipitous drops in recent quarters.