Microsoft, Yahoo forced into each others' arms

The software maker and Internet pioneer have both said they want to move on. But the fact of the matter is they need each other. Will they swoon on cue?

Although better known for her other child, necessity is also the mother of negotiations.

Yahoo has spent the better part of four months rebuffing Microsoft's advances , while the software maker declared on May 3 that it was moving on . But on Sunday, the two confirmed that they are still trying to work things out .

So why has this taken on the flavor of a bad celebrity relationship? Well, it turns out the list of potential partners for either company is fairly small. As I pointed out last week , Microsoft may have talked a tough game, but its search share has been going nowhere on its own and could desperately use the bulk that Yahoo's search share would give it.

The deal that may be under discussion--and strategically may be the best option for both companies--would be one that somehow puts Yahoo's search into Microsoft's hands. Still, there are a couple of challenges.

First of all, Microsoft's revenue per search is nowhere near Google's, so the raw economics of the deal make less sense than Yahoo-Google. That means, Microsoft may have to overpay to get Yahoo's search share.

That's not an unrealistic scenario, though. In offering $44 billion or more for Yahoo, Microsoft was essentially really overpaying for search share. Although its current products may not justify what it has to pay for a Yahoo search deal, Microsoft has shown a willingness to pay what it must in order to get in the game (think Facebook investment ). Plus, we're going to hear this week just how much better Microsoft's search technology has become .

The bigger hurdle, I suspect, is that a deal limited to search probably won't give Yahoo's investors the payday that an outright acquisition would. With Carl Icahn circling , this may not be enough.

So where to from here? Well, Microsoft said it is pursuing deals short of an outright buy. After reading Yahoo's statement, though, I suspect Microsoft is saying what it must to keep things friendly. I think we may see a deal that is focused on search, but we may also see the all-out purchase that Yahoo still says it doesn't want.

I'm getting on a plane to Seattle for Microsoft's Advance 08 advertising conference, so I'll see what I can dig up. In the meantime, think of it this way: Microsoft and Yahoo are saving us time and money. We get our fix of relationship drama without having to buy a tabloid or watch a soap.

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About the author

    During her years at CNET News, Ina Fried has changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley. These days, most of her attention is focused on Microsoft. E-mail Ina.

     

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