Why the Microsoft Yahoo Deal Doesn't Matter

Years ago I knew two people who had been dating for years, and kept talking about maybe getting married but just couldn't decide. For months, then years, we all got dragged through their ridiculous soap opera. She wanted to get married and kept hoping he'd propose. Then she got sick of hoping and gave him an ultimatum: propose by Christmas, or it's over. He called her bluff, and Christmas came and went, and she didn't toss him out. Meanwhile, he agonized over it. On the one hand, he thought he wanted to get married, but maybe not to her, but then again maybe she was the right one for him, because after all they'd been going out for so long and they knew each other so well ... blah, blah, blah. Finally she gave him another ultimatum, and this time he caved and proposed, and finally they did get married. By then we were all so sick of watching this awful spectacle that we didn't feel happy for them—just relieved that it was over.

This is how I feel about the 10-year deal that Microsoft and Yahoo announced today. These two companies have been dating and flirting and breaking up and then getting back together for so long that it stopped being interesting a long time ago. More than anything else, I'm just sick of reading about it on blogs. I'm just glad it's over. Mazel tov, Microsoft and Yahoo. And God bless you. Now would you please, for the love of all things holy, just leave us all alone? Please?

I mean, at first it was exciting. In February 2008, Microsoft offered to buy Yahoo for $45 billion, and hinted about going hostile if Yahoo didn't agree to its terms. That hot mess dragged on forever, and the terms were sweetened, and Carl Icahn got involved and added a spicy little circus sideshow element to the whole thing, but Chief Yahoo Jerry Yang (now the company's ex-CEO) made it clear that even if Microsoft and Icahn won over his shareholders, he and everyone else inside Yahoo would do their best to sabotage the partnership. So Microsoft walked away. Yahoo's market value collapsed. It tried to make a deal with Google, but regulators blocked it. Yang got the boot, and Yahoo brought in Carol Bartz, a tough talker from Autodesk whose biggest strong point may be simply that she lacks Yang's emotional baggage about the company, and she made the deal happen.

The deal is this: Yahoo will stop using its own search engine and instead will use Microsoft's Bing search engine, which is new and very nice. The search ads that run alongside search results will be managed by Microsoft's ad-selling technology. Together, Yahoo-Microsoft will have about 30 percent of the search market—Yahoo has 20 percent, Microsoft about 8 percent—while Google, their archnemesis, holds 65 percent.

Microsoft and Yahoo took pains to write this up so that Yahoo could save face. For one thing, Yahoo's salespeople will continue to sell ads. And Yahoo will save money by not having to develop its own search-engine technology anymore. Microsoft will pay Yahoo a generous split on the revenues generated by searches on Yahoo's site. Yahoo claims the deal will add $500 million to its annual operating profit.

But let's be honest here. Yahoo is the loser. They were weak, and vulnerable, and the truth is they had no choice but to go along. Microsoft hasn't been able to gain traction in the search market, but it has something better than traction—it has money. Now it has bought itself a position that will enable it to become a credible competitor to Google.

Because that's the real battle—Microsoft versus Google. For years, Microsoft CEO Steve Ballmer has been watching Google scoop up billions in search advertising revenue, and it's driving him nuts. He wants that money. He wants to kill Google. Yahoo has something Ballmer needed—a chunk of the search market. See, the thing about search is, size matters. The bigger you are, the more data you gather, and the better your searches can get. If you're stuck down in the shallow end of the pool, like Microsoft has been, with mere single-digit market share, you're jammed up. Because no matter how great your search algorithms might be, you still don't have enough data to make your engine work well. That's been Google's great advantage—the bigger it gets, the better it gets. And the better it gets, the bigger it gets.

So Microsoft needed more share. Yahoo had it, but didn't want to give it up. So Microsoft did what it always does. It waited. And pressed. And waited some more and pressed some more. It let Yahoo get weaker, and weaker. Then it found a way to make the deal happen. Yahoo is a pawn in all this, nothing more. The bottom line: this deal marks the end of Yahoo. The first great battle of the Internet age has been played out, and Yahoo lost. It is roadkill. Now the next great battle—Microsoft versus Google—begins.

Why the Microsoft Yahoo Deal Doesn't Matter | Business