A few thoughts on the Bing/Yahoo deal - it’s been about a week now since Carol Bartz decided outsource searches to Microsoft, effectively steering the company away from the technology business and (presumably) more towards the media and content/aggregation business.

For a few years now, the two companies have been attempting to join forces in one manner or another.  How did it finally happen?  Microsoft built a compelling product - their Bing search engine works well, has some interesting features, and has gotten generally good reviews.  The takeaway?  While previous unsuccessful Microsoft attempts to partner with Yahoo! depended on cash as a lever, this successful deal was based on the lever of product quality.

For all involved, I would like to think this would be (to use a currently fashionable buzzword) a “teachable moment”.

Yahoo will still receive the lion’s share (88%) of all revenue from all search-driven text ads, but won’t have to continue investing in the increasingly high stakes search engine arms race - all that’s been outsourced to Microsoft.   While this should have a positive effect on the Yahoo bottom line for years to come, so far the stock market (and consequently, Yahoo shareholders) have not been not amused: on the eve of the deal, Yahoo was trading at $17.22 per share - as I write, the stock is at $14.83, a drop of 14% - this during a week when the S&P 500 index rose almost 3%.  With last year’s final Microsoft takeover offer $33 per share still ringing in their ears, today’s price of $14.83 must be a tough pill for Yahoo shareholders to swallow.

Only time will tell if the unfavorable market reaction is valid - meanwhile, a  few thoughts about the deal itself:

• I think it was a good day at the office for Steve Ballmer - in one feel swoop (and for no direct cash outlay), Bing’s market share will rise to a meaningful 20-29% (depending on whose numbers you use).  While Google’s market share is still about three times that, the Bing/Yahoo deal finally makes Microsoft a truly relevant player in search.

• So, Bing is a viable search engine - was that alone enough to convince Yahoo to get out of the business?  I don’t think so.  The next big thing in internet search is going to be real-time (or near real-time) searching of user-generated Web 2.0 content such as Twitter and blogs.  To compete effectively, a search engine will soon  have some solution in place for this challenging problem - perhaps the substantial technical (and financial) investment required to do so was the final straw for Yahoo. It just might be that in 2009,  you simply have to have the resources of a Microsoft or Google to keep up with the web.

• Apparently, Yahoo will now focus primarily on content, content aggregation, and display banner advertising.  In the long-tail world of the web, though, search-driven (con)textual ads have proven a much more powerful and profitable business to be in.   That’s a cause for concern.  Luckily, though, there happens to be another promising high growth business that Yahoo’s already involved in, one they’re now free to pursue further:  look for Yahoo! to now push forward even more with their Connected TV partnership with Intel.   Time and time again, internet content on a web browser has proven tough to monetize.   Internet content on a television set, though - that’s another story entirely.

“Connected TV” could in fact be where Carol Bartz is taking the company (that’s what I’d do if I were her, at least).