Yahoo, Google Collaborate on Search Ads. Apocalypse Expected Soon.

In what must be one of the seven signs of the apocalypse, Yahoo and Google have agreed to extend the advertising tests they participated in last month to a broader-scale distribution partnership.

Under the agreement, Yahoo would outsource a portion of its search ad inventory to Google, and potentially to other providers in the future. Yahoo now has the option to display Google ads alongside its own natural search results and other Web properties in the U.S. and Canada.

Yahoo will select the search term queries and the pages where Google AdSense for Search or AdSense for Content ads will be shown. The deal does not affect Yahoo’s algorithmic search.

Yahoo expects the deal to improve monetization of its pages, potentially adding $800 million in annual revenue. In the first 12 months following implementation, Yahoo expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow.

The open bidding system will likely utilize the abilities of Yahoo’s Right Media Exchange software to deliver those third-party ads on Yahoo’s search results. Such a deal could still include spurned suitor Microsoft, which could also allay regulatory fears that Google is getting even bigger than it already is. To play nice with regulators, the two have agreed to delay implementation for up to three and a half months to give the U.S. Department of Justice time to review the arrangement.

The agreement has a term of up to ten years: a 4-year initial term and two 3-year renewals at Yahoo!’s option. Financial terms between the two companies were not disclosed. Either party will have the option of terminating the agreement in the event of a change in control of either party, but if Yahoo initiates it within the next 24 months, it will owe Google a termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement.

The two-week test in April reportedly affected about 3 percent of Yahoo search queries, and only applied to search traffic from yahoo.com in the U.S. and did not include Yahoo’s publisher network or other partners.

As an additional token of newfound camaraderie, Yahoo and Google agreed to enable interoperability between their instant messaging services.