With a potential transaction between Google still being considered and Microsoft being back at the negotiating table, is Yahoo now looking better? Time will tell, but things appear to be moving again.

For its part, Microsoft still maintains that it isn't discussing another takeover bid, but it reserves the right to do so it was quoted as saying...

Now things have centered on combining Yahoo's and Microsoft's search businesses, which are a distant No. 2 and No. 3, respectively, to Google's No. 1.

Last month's numbers from Nielsen Online place Google's market share of U.S. search at 62 percent versus 27 percent for a combined Yahoo-Microsoft duo. The trend of ever-shrinking market share hasn't been lost on executives at Yahoo and Microsoft.

The only single benefit would be cost savings. Yahoo spends about $1.2 billion a year on product development, much of that presumably on the search arms race with Google. It's very difficult to say with any amount of accuracy just how much Microsoft spends, but let's assume a similar number.

Combining the two search operations would probably reduce costs close to $1 billion. Assuming Microsoft would buy Yahoo's search operations, with some sort of revenue-sharing arrangement, the deal would make sense for both companies.

In the most recent quarter, about 87 percent of Yahoo's revenue came from advertising. If Microsoft essentially acquires all of Yahoo's ad business, both search and display, then it gets nearly all the benefits of a merger. Yahoo would become a pure content company, basically outsourcing its ad business to Microsoft.

But then again, why just stop at search? A combined Yahoo-Microsoft duo still has the edge over Google in display advertising. Kevin Johnson, president of Microsoft's platform and services division, said in a widely circulated memo to employees this past weekend that his aim was to disrupt the market in search and win in display advertising.

Johnson noted that Microsoft's ad revenues had increased 40 percent compared with declines at Yahoo and Google. This intense competition doesn't yet reflect Google's deployment of recently acquired DoubleClick but certainly suggests an intense campaign ahead nevertheless.

Now here's a deal that starts to make a bit more sense... This surely wouldn't be lost on Google, which has concluded a successful search advertising test run with Yahoo, and which would benefit from a display deal as well.

To be sure, Google should also be looking to acquire Yahoo's entire ad business in a cash-and-revenue-sharing deal...

Display is where Yahoo's sheer numbers are most compelling. What Yahoo has going for it is content and a vast number of unique visitors. Scale is what matters, just as it does for other important events such as Super Bowl advertising.

  This article was featured on Business 5.0.

Source: Tech Blog.