Does MicroHoo Have Staying Power? - Page 2

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Content matters

Yahoo also comes to Microsoft with something else -- content.

"Yahoo has probably the most visited sites on the Internet," Susan Feldman, vice president of search and discovery technologies at IDC, told InternetNews.com.

Tim Bajarin, president and principal analyst at Creative Strategies agreed.

"This gives Microsoft and Yahoo a better chance to compete with Google," Bajarin told InternetNews.com. "I think it's a very good deal for Microsoft, but it clearly also allows Yahoo to extend its branding [because] they are the number one site that people go to for content and information" he added.

Having a pair of competitors that are more nearly the same size, rather than a situation where there is one dominant player and two relatively weak players, will also likely spur more diversified spending by advertisers, analysts said.

Combining knowledge about what users search on could also be serendipitous. "They can share data about search that can place relevant ads higher, which will lead to higher revenue per search," Rosoff said.

Potential threats

Despite positive statements by several long-time Microsoft watchers, however, not every observer sees the agreement as mutually beneficial for both companies.

"On the face of it, this is a good deal for Yahoo. To begin with, it would keep the majority of its search ad revenue, and pay only 12 percent of it for Microsoft's tech services. Two, it would save millions of dollars on data centers, servers, mass storage and telecommunications costs, as well as on an army of expensive search engineers," said an initial assessment released Wednesday co-authored by IDC's Feldman and Karsten Weide, program director for digital media and entertainment.

However, the IDC analysts also see a longer-term outcome from the deal that could be a negative for Yahoo -- putting all its eggs in one basket.

"Alas, we maintain our position that this deal is strategically unwise for Yahoo. Search will remain the most important online advertising segment for years to come … so, why outsource search development to someone else without any control over that someone else's work?"

"Once search is outsourced, it will be almost impossible to bring it back in-house. Should Microsoft lose the race against Google in terms of search relevance and ad placement technology, Yahoo's ship would sink with Microsoft's," the assessment said.

Alternately, Enderle suggest that another threat is that the parties could sooner or later have a falling out, likely over money, especially given the deal's ten year terms.

"That is where this will be tested. It's a common problem in business where sales and development don't traditionally get along," Enderle said.