Microsoft-Yahoo Search Deal: 3 Reasons Why it Makes Sense

Computerworld — The Microsoft and Yahoo 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.

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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 $30 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 $44.6 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 $165 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% of the revenue in the first two years, and would receive 90% 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% to a high of 15.6% 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.

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