Microsoft, Yahoo forced into each others' arms

Although better known for her other child, necessity is also the mother of negotiations.

Yahoo has spent the better part of four months rebuffing Microsoft's advances, while the software maker declared on May 3 that it was moving on. But on Sunday, the two confirmed that they are still trying to work things out.

So why has this taken on the flavor of a bad celebrity relationship? Well, it turns out the list of potential partners for either company is fairly small. As I pointed out last week, Microsoft may have talked a tough game, but its search share has been going nowhere on its own and could desperately use the bulk that Yahoo's search share would give it.

The deal that may be under discussion--and strategically may be the best option for both companies--would be one that somehow puts Yahoo's search into Microsoft's hands. Still, there are a couple of challenges.

First of all, Microsoft's revenue per search is nowhere near Google's, so the raw economics of the deal make less sense than Yahoo-Google. That means, Microsoft may have to overpay to get Yahoo's search share.

That's not an unrealistic scenario, though. In offering $44 billion or more for Yahoo, Microsoft was essentially really overpaying for search share. Although its current products may not justify what it has to pay for a Yahoo search deal, Microsoft has shown a willingness to pay what it must in order to get in the game (think Facebook investment). Plus, we're going to hear this week just how much better Microsoft's search technology has become.

The bigger hurdle, I suspect, is that a deal limited to search probably won't give Yahoo's investors the payday that an outright acquisition would. With Carl Icahn circling, this may not be enough.

So where to from here? Well, Microsoft said it is pursuing deals short of an outright buy. After reading Yahoo's statement, though, I suspect Microsoft is saying what it must to keep things friendly. I think we may see a deal that is focused on search, but we may also see the all-out purchase that Yahoo still says it doesn't want.

I'm getting on a plane to Seattle for Microsoft's Advance 08 advertising conference, so I'll see what I can dig up. In the meantime, think of it this way: Microsoft and Yahoo are saving us time and money. We get our fix of relationship drama without having to buy a tabloid or watch a soap.

[The_Decider]

They will be overpaying for nothing. Many Yahoo employees will jump ship, who wants to work for such a mind-numbing company like MS? Many Yahoo users will also jump ship, many are using Yahoo simply because it is not MS.

If MS wants to add more weight to the anchor that is pulling them down, they certainly can. No one will miss them.

[James7777777]

Many Yahoo users will also jump ship, many are using Yahoo simply because it is not MS.

That's ridiculous. If they simply hate MS why not use many of the other search engines, or the current leader in search engines... Google? You may dislike MS, but that is not the consensus.

[The_Decider]

Very few people like MS and do business with them unwillingly. So when they can, they opt-out of the crap MS offers.

People who like MS are a tiny minority. People who like MS had have even the vaguest clue about tech is an even smaller minority.

[JCPayne]

I use Yahoo because it is not MS. And I pulled all my friends there too... Noboubt I'll be able to pull them all over to Google GTalk next tooo... Soo long Microsoft... Glad you paid for nothing.

[fredtheviking]

Everybody hates M$, Decider? I suspose that why they are the market leader in Office products and OSes. I think reality is that 90% of the people out there could careless about M$ and Yahoo. When it comes to search people use what they are familiar with. As long as M$ doesn't get rid of Yahoo search and the feature that it comes with, then I think they just get the Market share outright.

Plus most engineers will stay for the right price (I know I would).

[The_Decider]

MS is the market leader in OS's for one simple reason: unethical and illegal business practices. XP is way down on the list of current OSes, Vista is further down that list.

You can live in your fantasy world, but few people like MS and WILLINGLY do business with them.

[fortyonejb]

Only the zealots believe the rest of the world has the same convictions as they do. Fact is that 95% of the world that uses computers and are not in the industry or as "in the know" as us don't care one iota about the companies like we do. They use what works for them. Whether or not its the best, whether or not M$ is eeevil, they just use it cause it was easy and it gets them the results they want and they don't have to work harder to get something "better". That is why M$ controls so much of the market, they got the position to take the casual consumer who simply uses whats convenient and functional. As long as whatever outcome continues to function how the current user base expects it to, you won't see a big migration away from yahoo or M$. It is a fallacy to think those of us who really care make up more than 5% of the target market.

[The_Decider]

Most computer users use whatever is shoved in front of them. You are right, they are oblivious and ignorant. However, these people don't dictate the market or innovation, that comes from the 5% who actually know and care about computing.

[AppleSuxLeo]

Same thing happened to me years ago at the local 18/21 club...she was better looking after every beer , was just as satisfying as a better looking girl...but I dropped her off before the sun came up. I`m not sure MSFT has this option.