Microsoft Appears The Winner In Deal With Yahoo

The final makeup of the new relationship between Microsoft and Yahoo to fight Google's dominance in the online search and advertising business has disappointed investors, but appears to be positive for Microsoft.

Yahoo and Microsoft on Wednesday said they will work together in the online search and advertisement business, with Microsoft's Bing powering Yahoo's search capabilities and Yahoo becoming the exclusive worldwide relationship sales force for both companies' premium search advertisers.

Despite expecting such a move, investors slammed Yahoo on Wednesday, causing its share prices to fall 12.1 percent to $15.14. Google's shares fell less than 1 percent to $436.24 as investors looked at the impact of the deal on the company. Microsoft's share prices rose 1.4 percent to $23.80.

Allan B. Krans, senior analyst at Technology Business Research, a Hampton, N.H.-based analyst firm, wrote in response to the 10-year agreement between Microsoft and Yahoo that Microsoft by itself was just never able to get the momentum it needed in the online search and advertising market.

While Microsoft invested billions of dollars developing the technology and support infrastructure it needed to support the online search and advertising market, it still ended up with less than 10 percent of Internet searches going through its platform, Krans wrote.

The lack of search volume was a fundamental flaw that prevented any return from that investment. "Microsoft recognizes this, and is leaving no rock unturned in solving the issue. In addition to flat-out paying customers to use Microsoft product search, its desire to increase search volume was so strong that it was willing to pay more than $45 billion to purchase Yahoo less than one year ago," Krans wrote.

Despite the release of Microsoft's Bing search technology, the company would require years to build a serious presence in the market, making the deal with Yahoo Microsoft's best chance at tackling Google, Krans wrote. "This deal will instantly triple Microsoft's share of the search market, providing the scale to attract a greater advertising base, creating the possibility to monetize its search and advertising assets for the first time," he wrote.

Microsoft is clearly the winner in the deal, as it receives a huge boost in its search volume at what Krans called a fraction of the cost of acquiring Yahoo.

Krans estimated the deal between Microsoft and Yahoo will cost Microsoft between $500 million and $1 billion annually, a small price to pay considering the overall spend rate in online services is already approaching $6 billion per year.

"In hindsight, the failed $45 billion bid for Yahoo may seem like a blessing, as Microsoft avoided both a large financial outlay as well as the myriad of issues that would have been faced integrating a purchase of that scale. Microsoft experienced difficulties successfully integrating large acquisitions in the past, and the purchase of Yahoo would have presented a significant and likely a costly challenge," he wrote.