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Microsoft, AOL and Yahoo this afternoon announced a deal to sell display advertising inventory on each other’s sites.

The unusual collaboration between the web giants will “dramatically improve the process of buying and selling premium online display inventory,” giving advertisers the ability to reach larger audiences more efficiently, the companies promise in a joint news release.

The plan was first reported by AllThingsD in September. As we noted at the time, it’s an effort to compete more effectively against Google and realize a higher price for unsold advertising inventory than if they were to fill the space through advertising networks.

Here’s how the arrangement will work, according to the companies.

By integrating one another’s real-time bidding (RTB) technologies to facilitate the availability of nonreserved inventory by early 2012, Yahoo!, Microsoft and AOL expect to have the opportunity to access each other’s nonreserved inventory to achieve the benefits of scale and efficiency. The Microsoft Advertising Exchange and Yahoo’s! Right Media Exchange will initially serve as the two marketplaces from which the partners can procure this inventory for resale to advertisers and agencies. AOL may, at its discretion, opt to use its own exchange technology solution subsequent to the launch of the partnership.

Under the terms of the nonexclusive agreements, each company will continue to make its own decisions, differentiate its offerings and set its own controls for how it operates any exchanges, ad networks or other aspects of its display businesses. They will actively compete with each other for both advertiser spend and publisher partners based on their own unique product differentiators.

The arrangement creates another connection between Yahoo and Microsoft, which already partner on Internet search technology and search ads.

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