Microsoft CEO Steve Ballmer has been saying people don t understand the Microsoft-Yahoo search pact, and that the deal is a win-win. My question is, a win for whom?

For its part, Microsoft (MSFT) gains Yahoo (YHOO) market share as well as its search technology for no upfront cost. This is significant if, as I believe, effective search is a function of scale. Search algorithms employ, in part, the millions of search requests by users and their results. This is why I believe Google (GOOG) is a natural monopoly and why Google s searches, in my experience, are so much more effective than its competitors. (In my view, Bing is strong evidence that Microsoft still lacks sufficient scale. See my column Bing Is Here. Time to Sell Google?

Even with this deal, Microsoft's share of search (currently 28% based on comScore's search data for June) will be far behind Google s 65%. However, it s possible there s a point of diminishing return, and that once a certain scale is achieved, search algorithms don t get much better. If that s the case (and it s a big if ) Microsoft has scored a major coup. Of course it will still be in an ongoing research and development arms race with Google, but it would have incurred those expenses anyway unless it abandoned search altogether. I see no downside for Microsoft in this deal, and Ballmer should be gleeful that Yahoo was foolish enough to turn down his $47.5 billion takeover offer.

As for Yahoo, it s throwing in the towel on search. And what s it getting in return? Nothing upfront, but it will receive 88% of the revenue from searches originating from its sites even though they will now be performed by Microsoft. Perhaps more important, it will save the research and development costs associated with its futile efforts to compete with Google. Yahoo hasn t said just how much that might be, but has indicated it expects operating income to increase by $500 million a year once the deal is fully in place. This is a step I ve long advocated. If Google is indeed a natural monopoly, as I suspect it is, then Yahoo s efforts were doomed. There s no point in throwing good money after bad.

You can be sure that the ongoing costs of competing with Google would have been far greater than the meager 12% of revenue Yahoo is now ceding to Microsoft. This is a loss only for people still clinging to the illusion that Yahoo could have its own fabulously lucrative search engine like Google does -- a group that evidently counted former Yahoo management among its members -- and it may have been this blind spot that caused Yahoo to reject Microsoft s far more generous takeover offer. This will surely stand as one of the great business blunders in history. Yahoo s new CEO Carol Bartz deserves credit for facing reality.

But it s not clear to me that the deal addresses Yahoo s fundamental long-term problem: Why should people keep coming to Yahoo? It s never been self-evident to me that there s any natural monopoly or significant barriers to entry for Internet content. Yahoo does offer email, calendars and other services that tend to retain users, but it faces formidable competition from Google in those areas, too. Should visitors to Yahoo dwindle, so will searches on Yahoo, as well as the 88% of the revenue generated by those searches. If that happens, Yahoo would have been much better off with a big upfront payment.

Moreover, in outsourcing its search function to Microsoft, Yahoo has opted for the inferior search engine (in my opinion). This may further alienate visitors, who should always be Yahoo s top priority. Yahoo could have turned the function over to Google, as I ve advocated previously, even if the antitrust enforcers were likely to pounce. A lot of good they ve done: They blocked an earlier proposed Yahoo-Google partnership and the result for consumers is that there will now be just two viable search engines instead of three.

So I see Ballmer s point: The deal is a clear win for Microsoft, and a qualified win for Yahoo. The big question is whether it makes any difference in the only contest that really matters, which is the one with Google. The risk for both Microsoft and Yahoo is that the contest is already over. Second place won t really matter, especially as the competition shifts to Microsoft s home turf: operating systems.

I was once both a Microsoft and Yahoo shareholder, but no longer. The search war aside, all the momentum seems to have shifted to Google, Apple (AAPL) and Amazon (AMZN), which are increasingly worrying less about Microsoft and competing with one another (witness Google CEO Eric Schmidt s resignation this week from the Apple board). Now there s a competition to get excited about, which is why I own shares in (and have previously recommended all three.