by Shane O'Neill

Microsoft, Yahoo Deal: Why You Stand to Lose

Jul 29, 20093 mins
Data CenterOperating SystemsSmall and Medium Business

Of the Microsoft, Yahoo search deal, Microsoft CEO Steve Ballmer says "Both companies benefit from scale and better economics. Consumers really will get better products." That second part? Highly debatable, says's Shane O'Neill in this opinion piece.

After a year and a half of negotiating, Microsoft and Yahoo announced a search deal partnership this morning that will make Redmond’s new search engine, Bing, Yahoo’s search platform and put Yahoo’s sales force in charge of handling both companies’ search advertisers.

Microsoft and Yahoo posted a joint press release outlining details of the partnership, including video statements from Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz.

As noted last week, this puts the weight of the world on search baby Bing. It will now be the branded search engine for both Microsoft and Yahoo, try to build on close to 30 percent market share and compete with dominant household verb Google. A little over two months ago, Bing didn’t even exist.

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And despite statements from Yahoo about the partnership being a “significant opportunity for us” and calling Microsoft “an industry innovator in search,” Yahoo is handing over a core part of its business to a competitor with less than half the market share.

Sure, Yahoo benefits financially. Yahoo simply doesn’t have the money to operate and market its search engine effectively, and Microsoft has the deep pockets to handle that load. Microsoft will pay Yahoo through a revenue-sharing agreement based on traffic generated on Yahoo’s network of both Yahoo sites, as well as its affiliate sites. Microsoft will be able to integrate Yahoo’s search technology and gain more users and market share.

Yahoo says it expects the deal will boost its annual operating income by about $500 million, while reducing capital expenditure by $200 million and increasing operating cash flow by about $275 million per year.

So this is likely to be a win-win for both on the business side. Microsoft CEO Steve Ballmer said in a statement: “Both companies benefit from scale and better economics. Consumers really will get better products.”

He may be right about the first part; but the second part is debatable.

What consumers will get now is a two-horse race and limited choice. Bing’s search engine has been getting solid reviews; it does offer a more organized user interface than Google and was able to slightly increase Microsoft’s search share in its debut month. But how much will it really improve with the addition of Yahoo’s search? What’s worse, integrating the two could be a time-consuming and complicated mess, creating a “more is less” scenario.

The bottom line here: most people are comfortable Googling. Google is deeply entrenched in the hearts and minds of users. It may take awhile for the Microsoft/Yahoo partnership to be put into practice. The deal still has to get the green light from regulators, which could take months. Expect Google to raise a stink as well. Both Microsoft and Yahoo said they hope to close the deal in early 2010 .

Is there any good news for users in the deal? Google will be facing a more formidable foe that will slowly steal market share (keyword: slowly). The search king will likely be challenged and will innovate, creating better search to stay on top.

It could take two years, but the Microsoft/Yahoo partnership could awaken a renewed sense of urgency in Google, famous for its unrushed “beta” apps and features.

But right now this looks like a money grab for two wounded tech giants, not better search for you and me.

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