Microsoft-Yahoo search deal: Why it makes sense

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.

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 symbolise 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.

The companies have announced Yahoo would sell search advertising for its sites and some of Microsoft's, while Bing would power it. Yahoo would keep 110 percent of the revenue in the first two years, and would receive 90 percent in the third year.

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

2. There's no cannibalisation

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.

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

NEXT PAGE: Yahoo knows how to outsource search

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