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Summary:

Microsoft and Yahoo are starting to once again shoot coy glances at each other, with suggestions that Yahoo may either outsource or sell outright its search business to Microsoft. But no matter how much either company may hint that such a deal would make sense, the fact is that it’s the kind of deal that’s only going to happen because neither one of them had any better ideas.

There are, broadly speaking, two kinds of business deals: The kind that gets done because it’s clearly a good idea, and the kind that’s done because it’s the best idea anyone could come up with. The difference, of course, is that the latter usually ends up creating a mess.

Now that Microsoft and Yahoo are starting to once again shoot coy glances at each other, with suggestions that Yahoo may either outsource or sell outright its search business to Microsoft, it begs the question: Which kind of deal is this? The answer — no matter how much either company may hint that it would make sense — is that it’s the kind of deal that’s only going to happen because neither one of them had any better ideas.

In concept, the sale of Yahoo’s search assets to Microsoft has good logic behind it. It would give Yahoo cash up front and a share of search revenue for several years, shoring up its ability to refocus on other areas. And it would leave Microsoft with the most viable competitor Google has faced in a while. With concerns growing about Google’s domination of our online activities, some Internet users would welcome a good alternative.

But once you get down to the details of how the deal would work, it starts to make less sense. Unless the terms are different from what Microsoft proposed last year, this deal could prove messy for both companies in several ways.

Yahoo’s interest appears to hinge on its using search data to better target its graphic ads. But Microsoft would also use it for ads that compete with Yahoo, potentially undermining the very core of Yahoo’s revenue generation. Never mind that if people are skittish about sharing personal data with one company, they’re unlikely to want to share it with two.

Search innovation seems to thrive in a more creative corporate culture, like Google’s. Microsoft’s culture is relatively straight-laced — so from the perspective of innovation, it might make more sense for Microsoft to sell its search business to Yahoo. After all, Yahoo’s market share has been gaining in recent months, and its ability to target users has been winning positive reviews.

Microsoft has struggled with its search business, and there’s little reason to think buying Yahoo’s search business will change that. As a brand, live.com may not catch on fire. Meanwhile, Yahoo’s brand will be weakened without search. It’s not really clear what Yahoo is without its own search technology. Aside from a few notable exceptions like Flickr, its non-search entities are largely artifacts of Web 1.0.

Finally, there’s the issue of money. Last summer, Microsoft’s bid for Yahoo’s search assets was valued at $35 a share. Yahoo has been lately trading around a third of that. Will Yahoo settle for a big discount now that its share of searches is growing? Will Microsoft shareholders stand for a hefty premium to Yahoo’s market value? Someone — maybe everyone — will be unhappy with the price.

Under new CEO Carol Bartz, Yahoo has started to make some of the hard decisions that it evaded for years. Under her leadership, the company could emerge as a key player in online media. The last thing Yahoo needs is a distraction from that work, and selling a crown jewel to Microsoft could turn out to be just that.

By Kevin Kelleher

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  1. To Microsoft market share is the end to all means.
    From that point of view a deal makes sense no matter what, since they have shown not to be able to get there with their own ideas. They think ideas are free and it’s all about execution, leaving out the understanding of ideas.
    But from my point of view they are competing with a company which has shown to be as good if not better at execution(just look who build out infrastructure first and how) , so without new ideas. Game over in search.

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  2. Innovation of last resort. When all else fails and people cannot find jobs, SOME people will CREATE new product, services, and business models around them. I expect a growing number of people to use their broadband service to work from home and develop creative ways to provide valueable services to business and consumers.

    Despite the great value of linked-in, et. al. we still lack effective ways to match needs to capabilities. So one opportunity that could develop from the above would be better systems to supply to demand.

    For example, if I need someone that is well read in some industry standards, it is still an akward process of asking around to find that person. (I have m own secret method of finding these people) — but wouldn’t it be nice if there was a google/linkedin/monster hybrid that could do that.

    Various “consulting” platforms have tried, but fail to understand (at once) both the details and the wide range of experiences needed. They also artificially constrain the market by manually capping rates and creating taxonomies for services and products which they themselves do not understand.

    A huge value add would be to tie in something like this to Wikipedia. A knowledge base to knowledge-person connection. Perhaps it could be a revenue source to fund Wikipedia as well.

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  3. [...] The rest is here:  Microsoft + Yahoo Still Doesn’t Make Sense [...]

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  4. “Aside from a few notable exceptions like Flickr, its non-search entities are largely artifacts of Web 1.0″

    Search is an “artifact of web 1.0″ and not just for Yahoo! but anyone in search.

    Yahoo! has their search biz, and their display biz. What does concept of “web 1.0″ have to do with any of this?

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  5. I am, apparently, one of the very few people to think that Jerry Yang did all the RIGHT things in dealing with Microsloth. Microsloth is the death of innovation, and a deal with Microsloth spells doom for Yahoo as an innovator. Yahoo search is core to Yahoo’s business. People who don’t understand that, don’t understand the Web. So what if Google dominates? Good for Google, but who really cares about that fact when it comes to innovation? Yahoo has some amazing innovations both in development and available now. These need to be exposed to public view and refined for greater user-friendliness. Not sold to Microsloth for a quick buck! It really burns me how many people have blasted Jerry Yang without having 1/100th comprehension or concern with the issues at hand. It’s exactly this make-a-quick-buck-or-else-you’re-outta-here mentality which has brought the American economy into crisis.

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  6. Yahoo just needs to bear down and try to re-ignite itself. A tie-up with Microsoft would be disastrous. Yahoo’s assets are big enough to go it alone.

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  7. Yahoo has given too much attention to the whole Microsoft issue and hasn’t come up with even a single ‘awesome’ feature in the last few months.

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  8. Microsoft and Yahoo create new company in the future :) MicroHoo or Yamicrosoft :)

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  9. when yahoo get down knees to the Microsoft.Microsoft will eat it and will order Yahoo to think hard to face the giant Google.and so predictable once yahoo get down to be Microsoft.people will start buzzing about it and the buzz does will make Google collect more power and energy and will kick out yahoo fall get down faster

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  10. I think both SE’s realize they will never compete with Google for the major portion of search traffic. As Google increases it’s stregnth and marketshare it seems that Yahoo and MSN get weaker and weaker.

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