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Microsoft, Yahoo deal: why you stand to lose

Microsoft, Yahoo deal: why you stand to lose

Of the Microsoft, Yahoo search deal, Microsoft CEO Steve Ballmer says "Both companies benefit from scale and better economics. Consumers really will get better products." That second part? Highly debatable, says CIO.com's Shane O'Neill in this opinion piece.

After a year and a half of negotiating, Microsoft and Yahoo announced a search deal partnership this morning that will make Redmond's new search engine, Bing, Yahoo's search platform and put Yahoo's sales force in charge of handling both companies' search advertisers.

Microsoft and Yahoo posted a joint press release outlining details of the partnership, including video statements from Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz.

As CIO.com noted last week, this puts the weight of the world on search baby Bing. It will now be the branded search engine for both Microsoft and Yahoo, try to build on close to 30 percent market share and compete with dominant household verb Google. A little over two months ago, Bing didn't even exist.

And despite statements from Yahoo about the partnership being a "significant opportunity for us" and calling Microsoft "an industry innovator in search," Yahoo is handing over a core part of its business to a competitor with less than half the market share.

Sure, Yahoo benefits financially. Yahoo simply doesn't have the money to operate and market its search engine effectively, and Microsoft has the deep pockets to handle that load. Microsoft will pay Yahoo through a revenue-sharing agreement based on traffic generated on Yahoo's network of both Yahoo sites, as well as its affiliate sites. Microsoft will be able to integrate Yahoo's search technology and gain more users and market share.

Yahoo says it expects the deal will boost its annual operating income by about $500 million, while reducing capital expenditure by $200 million and increasing operating cash flow by about $275 million per year.

So this is likely to be a win-win for both on the business side. Microsoft CEO Steve Ballmer said in a statement: "Both companies benefit from scale and better economics. Consumers really will get better products."

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