It’s no “Microhoo,” but it will do

Microsoft CEO Steve Ballmer signs the search deal with Yahoo!, much to the delight of Carol Bartz, the CEO of Yahoo!.

A deal years in the making was concluded last week by Microsoft and Yahoo!. Investors severely punished the common shares of Yahoo! after the agreement was revealed, apparently upset at what it was not: An outright merger between the two giants, a prospect which was the source of much angst and speculation last year.

Actually, I think most Yahoo! observers had long given up on seeing the online media giant being taken over by Microsoft. They were hoping, however, that Yahoo! would get the “boatloads of money” that Yahoo! CEO Carol Bartz initially said she wanted in order to strike a deal with her rival in Redmond, Washington. Instead of getting the boatloads of money upfront, Bartz settled for steady ferryboat service bringing in the cash. (They do love their ferries up on Puget Sound!)

The bare bones of the deal: Yahoo! will cede its search technology to using Bing, the Microsoft search engine, on its Web sites. Microsoft will underwrite the IT infrastructure to support search on Yahoo! sites, an expensive proposition,  while Yahoo! keeps most of the revenues from advertising on its sites. Yahoo! gets the majority of its sales from advertising and online marketing, so it didn’t give up a lot in exchange for not having to buy and maintain all those Web servers for searching.

The main issue is that Google dominates the Web search market with a 65% share; Microsoft and Yahoo! will combine into a solid No. 2 competitor with their 10-year deal, together holding about 30% of the search market. Steve Ballmer, Microsoft’s CEO, argues that the proposition is a win-win for his company and for Yahoo!, allowing them to compete more effectively with Google without all the messy issues of a corporate merger. The proof of that argument, of course, remains to be seen.

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Photo courtesy of Yahoo!.