Microsoft Resumes Deal Talks With Yahoo

The revelation that Microsoft and Yahoo are in some sort of talks, discussing some sort of "transaction," is the latest weird twist in this corporate saga. What that transaction could be is a matter of speculation. Microsoft's said it's not trying to marry Yahoo, but did leave open the option of maybe making a wedding proposal at some later date. Perhaps all they need to do is work out some issues in couple's counseling.

More likely is that Ballmer is scrambling to keep Yahoo from getting too cozy with Google.

As we've said before, an outright acquisition of Yahoo by Microsoft would likely end in a wreck, but some of the potential transaction scenarios being bandied about could make a lot of sense.

Microsoft's Yahoo bid, unveiled Feb. 1 and pulled two weeks ago, was an admission that the company is dangerously far behind when it comes to the online game, which is the future and represents a threat to its dominance in desktop software. Why install applications on your hard drive when you can access them through your browser?

Google's run away with the lucrative and fast-growing search advertising market. Yahoo is but a distant second to Google; Microsoft, a distant third. Even if Microsoft and Yahoo combined their respective market shares they would still have only half of what Google has. But they would represent a legitimate alternative for ad buyers and would have a far greater volume of page inventory on which to place ads.

Search is a natural monopoly. The more people who use Google search, the better the results get. Everybody wins: consumers, advertisers and publishers. But just because it's a natural monopoly doesn't mean there isn't room for another big player, one with, say, 20%, maybe even 30%, of the market.