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yahoo_logoThe search partnership between Microsoft and Yahoo is getting even frostier: Newly released court records show that Yahoo is questioning Microsoft’s long-term commitment to the deal as Steve Ballmer prepares to leave his role as CEO of the Redmond company.

Despite those qualms, Yahoo must continue with the transition to Microsoft’s Bing Ads technology in Taiwan and Hong Kong, said U.S. District Judge Robert Patterson, Jr. of the Southern District of New York in ruling issued today.

Though the two companies initially planned to have all ads in the Taiwan and Hong Kong markets transitioned to Bing Ads by 2011, the filing states that the rollout was stalled by technical difficulties, leading the two companies to plan on completing the transition by October of this year. But then, in September, things hit a snag. While there weren’t any technical hurdles facing the transition from Yahoo’s Panama platform to Bing Ads, Yahoo said that it was concerned about Microsoft’s long term commitment to Bing Ads in light of Steve Ballmer’s retirement announcement, and wanted to hold off until after Ballmer’s replacement was appointed.

“If we decide a new CEO has the same commitment that Steve Ballmer had, then we will go forward with the transition,” Laurie Mann, Yahoo’s Senior Vice President of Search Products said in her testimony before the court.

Yahoo CEO Marissa Mayer, who inherited the deal when she took the helm of the company, echoed that sentiment. “This is about [the new Microsoft CEO]’s strategy and commitment to moving forward,” she said, according to court records.

According to the judge’s opinion, Yahoo said it wanted the delay because moving its advertising over from Panama to Bing Ads in Hong Kong and Taiwan is “permanent,” and Yahoo couldn’t go back to its own proprietary system.

The two parties went to an arbitrator, who ruled in favor of Microsoft. Yahoo then filed the lawsuit in the Southern District of New York to try and get the arbitrator’s decision reversed. Judge Patterson ruled in Microsoft’s favor today, saying that the arbitrator did have the authority to impose an injunction on Yahoo mandating the transition.

Marissa Mayer

Microsoft and Yahoo announced their search alliance in 2009, joining forces in an effort to compete more effectively against Google. Ballmer was a champion of the deal, which was struck with then-Yahoo CEO Carol Bartz, following Microsoft’s unsuccessful bid to acquire Yahoo.

Microsoft provides the underlying search technology for Yahoo and powers the search-related advertising platform. So far, the results haven’t met expectations, and after coming on board, Yahoo CEO Marissa Mayer reportedly talked extensively with Ballmer about finding ways to improve the partnership.

Under the deal, Microsoft has made sizable payments to Yahoo for a period of time to guarantee a certain level of revenue per search, making up for shortfalls in the transition to Microsoft’s ad platform. But those payments won’t go on indefinitely. In Yahoo’s quarterly earnings call last week, finance chief Ken Goldman said reduced payments from Microsoft hurt Yahoo’s revenue growth.

The partnership also hasn’t been able to significantly cut into Google’s lead in the search business. Microsoft has risen to 18 percent of the U.S. search market, according to the latest numbers from comScore Networks, but Yahoo — which led Microsoft Bing in U.S. search market share before the companies entered their partnership — saw its share slip to 11.3 percent.

Yahoo’s Microsoft search alliance is slated to run for 10 years, but Yahoo can terminate (or renegotiate) the deal if it doesn’t meet financial benchmarks. In the meantime, Yahoo has been strengthening its ties to Google, Microsoft’s archrival and Mayer’s former employer.

For its part, Microsoft says that it is still committed to both its partnership with Yahoo and to the Bing Ads platform.

“We had a narrow disagreement regarding the Search Alliance rollout in Hong Kong and Taiwan. We have unwavering plans to continue investing in the Search Alliance, now operating in more than 20 countries, and the Bing platform, which is central to our latest products,” Microsoft said in a statement.

Reuters reported on the filing earlier tonight. Yahoo was not available for comment at press time. A copy of Judge Patterson’s opinion is below.


Todd Bishop contributed reporting to this piece.

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