Yahoo Makes Ultimate Concession, Tests Google Ads

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If Yahoo's movements in recent weeks have been a series of chess moves in its slow-moving stand-off with Microsoft, this one may be the equivalent of promoting a pawn to queen. It's also a very tough pill to swallow.

Yahoo has agreed to conduct a limited test of Google's search ads on its own results pages. The difficult decision comes more than a year after Yahoo released its Panama platform for search ads monetization, which itself was the product of many months of intensive development.

The news came in the middle of a bizarre day for Yahoo. Reports also surfaced that Yahoo is close to a deal to merge its Internet operations with AOL, and that Microsoft and News Corp. are in "serious" discussions on a joint bid for Yahoo.

The two-week search ads experiment applies only to Yahoo search results in the U.S., and will be capped at 3 percent of Yahoo's total search queries. In a brief statement today, Yahoo insisted the trial does not "necessarily" mean the company will join Google's AdSense for Search network.

In opposition, Microsoft General Counsel Brad Smith issued a statement this afternoon saying any formal agreement between Google and Yahoo would amount to a virtual monopoly on search ads.

"This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo," he said. "Our proposal remains the only alternative put forward that offers Yahoo shareholders full and fair value for their shares, gives every shareholder a vote on the future of the company, and enhances choice for content creators, advertisers, and consumers."

Last weekend Microsoft issued an ultimatum to Yahoo's board, giving it three weeks to approve his company's $44.6 billion acquisition bid.

Yahoo quickly responded, reiterating its position that Microsoft's bid undervalues the company. A public letter from CEO Jerry Yang and chairman Roy Bostock was unusually personal in tone. "Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit," it said, referring to Microsoft CEO Steve Ballmer.

Then on Monday, Yahoo offered new details on its upcoming ad network platform, a release that seemed timed in response to Microsoft's warning.

Investors and search analysts have urged Yahoo to consider outsourcing its search ads to Google going back about a year. Yahoo reportedly entertained the option most recently during talks with Google in February. Story has been updated with new information.