Microsoft, Yahoo Deal 'Not Better Than the Last Deal,' Says Ballmer - Page 2

This new deal, Bartz suggested, is beneficial for Yahoo in that it lets the company keep its user interface, while simultaneously giving it access to Microsoft's technology.

The deal also marks something of a sea change in Yahoo's position. At May's seventh annual D: All Things Digital conference in Carlsbad, Calif., Bartz told an audience that Yahoo would only sell its search apparatus to Microsoft in exchange for "boatloads of money" up front.

Then in June, Bartz suggested at the Bank of America and Merrill Lynch U.S. Technology Conference in New York that any sort of deal between Microsoft and Yahoo would save the latter between $500 million and $700 million, mostly through staff reductions and data center cutbacks. At that same event, she suggested that the initial interest in Bing was "temporary" and that Yahoo would "be better off if we never heard the word 'Microsoft.'"

But in July, rumors had started circulating that Microsoft and Yahoo had returned to the bargaining table to hash out details of a potential search and online advertising partnership. Although both companies refused to comment, rumors suggested that Microsoft would pay Yahoo several billion dollars in exchange for the latter's search advertising business and revenue guarantees.

Debate erupted among analysts over whether Microsoft's newly launched search engine, Bing, would have an effect on whether the Redmond, Wash., company would decide to actually pursue Yahoo with renewed vigor, and what shape a potential deal would take. Some analysts argued that the signs of potential success in Bing's first few weeks of life would scuttle any potential Microsoft-Yahoo collaboration, as Microsoft would feel an increased confidence in its ability to navigate the online search arena on its own.

However, BroadPoint AmTech's Benjamin Schachter argued the opposite, saying that a strengthened Bing could put Microsoft in a position to approach Yahoo with deal terms. "We believe any continued success of Bing may actually increase the odds of a Microsoft/Yahoo tie-up," he wrote in a July 15 research note.

Microsoft and Yahoo currently hold 8.4 and 19.6 percent of the U.S. search engine market, respectively, versus Google with around 65 percent. By combining forces, Microsoft and Yahoo can jointly control nearly a third of the market, giving them more of a competitive advantage versus their mutual archrival. The deal could also potentially slow the erosion in Yahoo's paid search spend, which according to a July report by research company SearchIgnite had declined year-over-year by 26 percent, with most of that share being lost to Google.

Indeed, a combined Microhoo will offer both companies a potential advantage not just in increased market share, but also advertising revenue. "It's about the implications of that market share," David Smith, an analyst with Gartner, said in an interview with eWEEK. "With advertising, it's a feedback loop: The more you have, the better you get. Yahoo and Microsoft will be able to compete on more of a price basis with Google."

The partnership benefits Microsoft in more ways than if it had chosen to simply forge ahead with Bing. "It's a much more focused effort now," said Smith. "[Yahoo and Microsoft] could both benefit from the economies of scale, and avoiding a duplication of effort."