Yahoo Japan Agrees to Use Google Technology to Widen Lead in Home Market

Yahoo! Japan Corp., operator of the nation’s most-visited web portal, will use Google Inc.’s Internet search and advertising technology to replace its existing system as early as this year.

The companies today signed a two-year contract with an option to renew, the Tokyo-based company said in a statement that included its fiscal first-quarter earnings.

The agreement would mean that more than 80 percent of Japanese search queries will run through Google, a blow to Microsoft Corp. The deal frees Yahoo Japan, partly owned by Sunnyvale, California-based Yahoo! Inc., from having to develop its search technology and may help it in mobile search as handsets equipped with Google’s Android operating system become more popular.

“If Yahoo Japan started using Google’s search engine and if its services were then used on Android smartphones, an agreement may have big implications,” said Atsuo Takahashi, an analyst at Mizuho Securities Co. in Tokyo. “For Yahoo Japan, this deal could be quite positive.”

The agreement will prevent Microsoft from extending its 10- year deal with Yahoo to Yahoo Japan. Microsoft, which said it has less than 2 percent search share in Japan, called the deal “anticompetitive.” In 2008, Google backed off a search partnership with Yahoo in the U.S. after U.S. regulators threatened a challenge.

‘Anticompetitive’ Agreement

“This agreement is even more anticompetitive than Google’s deal with Yahoo in the United States and Canada that the Department of Justice found to be illegal,” Microsoft General Counsel Brad Smith said in a statement. “The 2008 deal would have locked up 90 percent of paid search advertising. This deal gives Google virtually 100 percent of all searches in Japan.”

Google consulted with the Japanese competition authority and “they had no objections to the deal,” Adam Kovacevich, a Google spokesman, said in an e-mail.

Google will license its ad software to Yahoo Japan, which will continue to manage its own ad systems and client relationships, he said. Yahoo Japan will also be able to customize Google’s search.

“This kind of arrangement is commonplace in the business world and it doesn’t foreclose robust competition,” Kovacevich said. “Toyota sells its hybrid technology to Ford, even though they compete against one another in selling cars.”

The Japanese Internet company, 35 percent owned by Yahoo and about 40 percent by Softbank, had more than 52 million users as of March, according to a Nomura Holdings Inc. report this month that cited a Nielsen Online survey. Yahoo Japan accounted for more than 50 percent of the nation’s Internet search market by queries, the report said. Google has about 31 percent, according to the report.

‘Step Ahead’

“Right now, there are a lot of areas which Microsoft hasn’t prepared for,” Yahoo Japan President Masahiro Inoue said at a briefing in Tokyo today. “Google is one step ahead in terms of providing information in Japan.” He didn’t elaborate.

Microsoft’s Tokyo-based spokesman, Masaki Iida, said he couldn’t comment because the matter is between Yahoo Japan and Google.

Yahoo and Microsoft won regulatory approvals in the U.S. and Europe in February to integrate their Web-search businesses and challenge Google. Yahoo plans to use Microsoft’s Bing search engine on its sites and to complete the integration in the U.S. by the end of the year.

Google Technology

Fees for using Google technology will be about the same as those Yahoo Japan currently pays to Yahoo, Inoue said. Yahoo Japan used Google’s Web-search system between 2001 and 2004.

The Wall Street Journal’s All Things Digital blog reported earlier today that Yahoo Japan may use Google’s search technology instead of Microsoft’s.

Yahoo Japan net income rose 12.6 percent to 21.7 billion yen ($248 million) in the three months ended June 30, Yahoo Japan said. The result is in line with an estimate by Keiichi Yoneshima, an analyst at Barclays Capital Japan Ltd.

Yahoo Japan rose 1.2 percent to close at 35,150 yen on the Tokyo Stock Exchange, extending its gain to 26 percent this year. The Topix index has fallen 6.8 percent.

To contact the reporter on this story: Adam Le in Tokyo at ale14@bloomberg.net

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