On at least one level the deal appears to be a no-brainer. Yahoo's search capabilities are quite good for consumer search, but they lack Microsoft's investments in the engineering mojo of its Powerset-enhanced Bing search engine to accelerate the maturing of search results into rich, contextual content. Yahoo has good ad technology and brand marketing, but needs both more inventory and more overall market share to get a more serious share of advertisers' budgets. Each organization will be able to take capital out of competing for their common but smaller pieces of the online search and ad pies and concentrate more on drawing market share away from Google and other sites using Google services. In doing so they will be able to build online and mobile revenues more effectively through their combined audiences.
This is all good, and probably well-needed competition for Google to strengthen the online breed. It also puts Yahoo's efforts to re-engineer its future as a direct competitor to Google comfortably in the past: Yahoo's greatest growth came during its earlier technology partnership with Google, which allowed Yahoo to concentrate on user experiences and content partnerships more effectively. Different partners, now, but similar opportunities await. So in spite of the "Yahoo has thrown in the towel" rhetoric floating around - or worse - there's reason to believe that this alliance is a good step towards Yahoo using its more limited assets to do what most successful Web companies do anyway: use alliances to do what you do best and to leave the rest to others. Bing will kill the Yahoo brand no more than Google's search and ad alliance killed the AOL brand; there's plenty of room for Yahoo to be a strong aggregator and services provider through and around Bing's capabilities. It may also, of course, be a way for Microsoft to absorb the benefits of a Yahoo one step at a time while avoiding regulatory issues that an acquisition might raise, but given the iffy online future for both companies individually it's probable that a trial marriage through this deal that strengthens the assets of both companies is a more realistic step at this time than risking capital on a merger.
Yahoo is also not relying simply on Microsoft to reposition its strengths in the Web marketplace. In today's world of virtual aggregation, Yahoo's recent home page redesign beta, which includes links to major online Web sites such as Facebook and eBay is an indication that they have finally accepted that Yahoo's strength as a brand can't grow exclusively on traditional content licensing deals. If Yahoo is to be the "starting point" of using the Web, as suggested by Jerry Yang, Yahoo’s co-founder and former chief executive, then it has to do as the Web itself does and become more adept at using links as a form of powerful brand endorsement. A media cynic may look at this and say, "Well, it's nothing more than a big Huffington Post with some extra ecommerce features," but if it does what people want it to do and they come back for more, then, well, who's going to laugh last? A successful product is first and foremost about meeting the needs of your markets cost-effectively, after all.
There are still many hurdles for Yahoo to overcome before it can be labeled a truly "hot property" again, but the new Microsoft alliance and the home page redesign are both key indicators that Yahoo is focusing increasingly on the things that will keep people coming back for more. The days of walled gardens filled with licensed content built one deal at a time are a waning phenomenon, but that leaves many hopeful days ahead for those who help people make the most of their online experience in whatever garden suits them best. Hopefully Yahoo will remain a key player in those efforts through their latest moves.