Only last year, Microsoft offered to buy the whole of Yahoo for a price of somewhere around $40 billion dollars. This week, Microsoft managed to get the part they really wanted, the search traffic from Yahoo visitors, for almost nothing. What was Yahoo thinking?Microsoft's Ballmer says that nobody "gets" the Yahoo deal because the two will share Bing revenue. He's probably right that the combined Microsoft-Yahoo market share will create a more attractive market for advertisers, and offer a stronger alternative to Google. Yet the coalition will still be a distant second, and there will be predictable pain as Microsoft and Yahoo transition from competitors to cooperators.
Yahoo's investors think they understand the implications of this deal quite well, which is why the stock tanked after the deal reveal. Microsoft got the milk it wanted with no expenditure of up-front cash to purchase the cow. There are certainly some good parts left in Yahoo, but it's not clear whether any of them have a lot of monetary value. Potential future Yahoo suitors may also be scared away by the 10-year exclusive search technology license that Yahoo has signed with Microsoft.
Let's look at the bright side of this deal -- that is, the Microsoft side. Of course Ballmer loves this deal, it makes him look like a genius. The original deal that Ballmer offered to Yahoo last year was a horrible one for Microsoft. Jerry Yang's stubborn refusal to accept that overly generous offer, combined with the subsequent collapse of the economy and an apparent lack of vision from Yahoo leadership, brought Yahoo back to the table.
However, this deal doesn't change one fundamental fact: Yahoo is giving up control of both business and technology in return for potential future revenue that depends on both companies executing well in a field where neither Microsoft nor Yahoo have succeeded in the past.