Microsoft-Yahoo search deal: 3 reasons why it makes sense

The Microsoft Corp. and Yahoo Inc. courtship that has been taking place on and off for the past four years had grown as tiresome as the annual Brett Favre retirement watch.

But unlike the All-Pro quarterback, who finally decided Tuesday to remain retired from football for good, Microsoft and Yahoo apparently decided that day to do the opposite, and finally come to a belated embrace in order to take on their common foe, Google Inc.

While the deal will no doubt face extra scrutiny -- and criticism -- from jaded observers, it also appears to be a winning one. Why?

1. It's no Heaven's Gate (or Waterworld)

Heaven's Gate was the late-1970s Hollywood epic that clocked in at five-and-a-half hours and cost a then-unheard-of $US30 million to film. It was the standard for bloated box office bombs, until Kevin Costner's Waterworld drowned in 1995.

Similarly, the Microsoft-Yahoo merger that almost took place in spring 2008 for $US44.6 billion would have set the modern standard for overpriced acquisitions, becoming the symbol of the end of the Web 2.0 era, just as the $US165 billion AOL-Time Warner merger came to symbolize the end of the dot-com era and its excesses.

A search partnership with Microsoft's up-and-coming Bing search engine becoming the default engine for Yahoo will, far from leading to overspending, likely help Yahoo save hundreds of millions of dollars in R&D investment, and potentially help both vendors reap more advertising dollars by combining forces to create the scale that Madison Avenue apparently craves.

According to a report late Tuesday by AllThingsD, Yahoo would sell search advertising for its sites and some of Microsoft's, while Bing would power it. Yahoo would keep 110 per cent of the revenue in the first two years, and would receive 90 per cent in the third year.

That will generate billions of dollars for Yahoo, according to AllThingsD, citing anonymous sources, enable Microsoft to become the clear No. 2 in search behind Google.

2. There's no cannibalization

As much as Microsoft and Yahoo differ in the general public's eye, a merger between the two companies would have resulted in a massive overlap of workers and products, and billions of dollars of cannibalized revenue. A smaller deal results in less risk of potential downsides.

Since Bing's launch on June 1 as a replacement for Microsoft's Live Search, its market share has risen from 5.5 per cent to a high of 15.6 per cent and then continued to rise and fall. But those have pretty much paralleled rises and falls in Google's usage, according to figures published by StatCounter.

In other words, Bing appears to be stealing users away from Google, not Yahoo, whose market share has remained fairly steady at about 11 per cent.

Combining forces will give the two search portals a total share of almost 20 per cent, based on Monday's figures from StatCounter, with minimal cannibalization.

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3. Yahoo knows how to outsource search

Having started as a human-created directory of Web sites rather than a search engine, Yahoo arguably has neglected search almost as much as Microsoft historically did.

For many years, Yahoo used search technology from Inktomi Corp., culminating in its purchase of the company in 2002. Just a year later, it bought Overture Services Inc., which owned the AlltheWeb and AltaVista search engines.

Despite owning all of these search engines, Yahoo continued to license search technology from Google for several years, before deciding to go back to the drawing board and roll its own, the current Yahoo Search.

While Yahoo Search has rebounded and holds more market share than Bing as of Monday, according to StatCounter, it appears to benefit mostly from integration with Yahoo's many portal properties, as well as Yahoo's expertise at selling to advertisers.

Meanwhile, financially struggling Yahoo lacks Microsoft's deep pockets to invest in either improving Yahoo Search's technology or marketing it.

CEO Steve Ballmer has said Microsoft is willing to commit up to $US11 billion a year on Bing in order to catch up to Google.

While dropping Yahoo Search could leave the company vulnerable if Microsoft ever decides to abandon the deal, in the near term it will save Yahoo lots of money and help it reap billions, too.