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Remember last year when Microsoft offered to buy Yahoo for $45 billion, and Yahoo was all, “Sorry, but it wouldn’t be in the best interest of our shareholders” and “You don’t value me high enough”? Well, Yahoo has apparently done some soul/market share searching regarding its place in the Google-dominated Internet search sector, and concluded that making a deal with Microsoft might not be such a bad thing after all.

According to BusinessWeek, the 10-year deal represents the first serious “threat” to Google’s search engine supremacy since Google sprinted ahead of its competitors to claim a whopping 65 percent of the search market share. However, it will be quite a while before Google will be looking over its shoulder, considering that even with the new deal, Microsoft and Yahoo are expected to still only reach a 30 percent market share. Granted, this is better than Yahoo languishing at a distant second and Microsoft consigned to an even more distant third, but in the end, all it really does is assure that both companies are able to hold onto second place more effectively.

As for the deal itself, it’s fairly straightforward. Yahoo will now use Microsoft’s “decision engine” technology, Bing, to power its search services, while Microsoft’s AdCenter will be in charge of distributing the ads that accompany Yahoo search results. Yahoo will still be able to sell ads for its own sites, as well as on Bing, and it gets to pocket 88 percent of the ad revenue generated on its site. In exchange, Microsoft gets to keep all of the precious, precious user search data that is generated. This data is crucial to delivering the most relevant ads as possible to users, and will undoubtedly prove far more valuable than the money Microsoft will be losing out on the ad revenue side.

Speaking of money, the deal is expected to boost Yahoo’s annual operating income by a cool $500 million, while at the same time saving the company $200 million in its technology development sector. Although, this kind of rosy assessment of how the deal with benefit Yahoo financially might be more style than substance, for as SearchEngineLand editor Danny Sullivan told BusinessWeek:

”Yahoo doesn't want to look like they've sold off their crown jewel for short-term gain…This creates the illusion that they have more control of the situation than they probably do."

Ouch. Yet, it seems like a fairly accurate assessment of the situation, especially in light of the particulars of the deal, and the fact that Microsoft clearly seems to be benefiting quite a bit more than Yahoo (Microsoft’s market share will jump 20 percentage points, while Yahoo’s will only increase by 10 percent, for instance). Of course, the deal still has to be approved by the suits in charge of that sort of thing, but that’s expected to be a fairly painless process, considering that Google will still control a solid majority of the search market even if the deal is approved. That doesn’t mean Google will stay silent though, and its objections could gum up the whole process for at least a little while.

This deal is obviously big news; so, expect to hear plenty more about it over the course of the foreseeable future. In the meantime, if Google wakes up, just tell it everything’s alright, and tuck it back into its golden bed.

What’s your take on this Microsoft/Yahoo search deal?

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