AOL vs. Yahoo: A Tale of Two Search Deals

Updated: You know things are bad when AOL’s (s aol) search business looks better than yours. That’s the position in which Yahoo (s yhoo) finds itself. The company said in a securities filing yesterday that it has lost a lucrative search-advertising deal with South Korea’s largest search engine, which some analysts say could carve as much as 10 percent off Yahoo’s gross revenue. Meanwhile, AOL today signed a deal with Google (s goog) to extend its existing search partnership for five years, and the new arrangement will also expand the services — and potentially the revenue — that it gets from the search giant.

In addition to search and keyword-related advertising, the new AOL-Google deal includes a mobile partnership for the first time, and AOL has agreed to distribute its video content through YouTube, as Ryan noted in a post at NewTeeVee. There was some speculation that AOL might look elsewhere for a search partner after its arrangement with Google expired, which it was scheduled to do in December. AOL originally signed the deal with Google in 2002, after the search company agreed to invest $1 billion in the former Time Warner (s twx) entity in return for a 5-percent stake. The extension involves no further investment by Google (which wrote off most of the previous investment).

The fact that AOL’s chief executive, Tim Armstrong, helped negotiate the previous deal while he was at Google (he’s the former head of U.S. sales at the company) probably helped cement the new partnership. Armstrong told PaidContent in an interview that the new deal should make the portal’s search traffic more lucrative — something the company desperately needs, since the volume of that traffic is declining as the service continues to lose subscribers, and AOL’s overall revenue declines along with it.

Yahoo — which recently signed a partnership deal with Microsoft (s msft) to use its Bing search as the default for Yahoo’s properties — may be doing better than AOL when it comes to overall revenues, but its search-advertising business will take a hit with the loss of the contract with South Korea’s NHN, which has 65 percent of the search market in that country. According to UBS Securities analyst Brian Pitz, the loss of the South Korean search-ad deal could cut Yahoo’s gross revenue by about 8 percent, while another securities analyst estimated gross revenues could be chopped by as much as 10 percent (Update: A Yahoo representative emailed to point out that the deal with NHN represented “less than 1 percent of Yahoo!’s gross profit in the first half of 2010”).

The Yahoo-Microsoft partnership took another hit earlier this year when Yahoo Japan — which is partially owned by the U.S. web portal — dropped Microsoft and signed a search deal with Google. While it may not be strictly apples and oranges to compare Yahoo’s loss of the South Korean arrangement with AOL’s partnership with Google, one thing seems fairly obvious: at least in the short term, search revenue at Yahoo looks to be going down, while AOL’s search business looks to be getting better — or at least to be slowing its gradual decline.

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Post and thumbnail photos courtesy of Flickr user Graham Hills