What's Up With Yahoo and Microsoft?

The Yahoo! deal with Microsoft was on everyone's lips yesterday.

To recap, after Yahoo turned down numerous attempts by Microsoft to take over the company in 2008, the two Internet giants found they could agree to a deal in 2009 in which both focussed their gunsights on Google. Another case of "The enemy of my enemy is my friend."

The partnership--if approved by Federal regulators--will last for ten years. Yahoo is giving up control of its own search engine, which will now be powered by Microsoft. Yahoo will provide the sales force for the new partnership.

Microsoft is giving 88% of the ad revenue from the search engine partnership to Yahoo for the first five years of the deal.

Let's examine the pluses and minuses of this partnership.

FOR ADVERTISERS: According to the recent comScore press release here during the month of June, 2009, Google dominated the search engine market with nearly 65% of the business. Yahoo had about 20% of the market and Microsoft's new search engine Bing had 8%.

Neither Yahoo nor Microsoft alone has enough traffic to lure advertisers away from Google. However, with their combined 28% of the market and all the publicity about Bing, the partnership offers customers reasons to split their advertising budget between Google and Bing.

FOR MICROSOFT: This is not only about "search." Google threatens the core of Microsoft's cash businesses by developing apps that are web-based and either free or very cheap. Microsoft is built on the concept of proprietary PC-based applications.

By making a deal with Yahoo, Microsoft is counting on diverting advertising dollars away from Google, hopefully weakening its rival.

Microsoft also gains access to Yahoo's search technology and search results. One of the things about search is that the more searches a company does, the more it learns about consumers, which helps it to refine and improve its algorithms.

FOR YAHOO: The company makes a partner of Microsoft, which was threatening a hostile takeover just a year ago. The deal also allows Yahoo to cut huge costs, trading those for a 12% reduction in search revenue. Yahoo can now focus on developing content for its sites, which will continue to run billboard ads.

Google will probably try to convince regulators that the Microsoft/Yahoo partnership poses an antitrust threat and should not be approved.

Stay tuned . . .