For those of us standing in the sidelines, the buzz about the Microsoft – Yahoo deal is positive because people feel that the partnership will finally provide some competition to Google. However, Google’s share was 65% before the deal and it remains 65% after the deal. So, how does the deal enhance competition? For one, as both Carol Bartz (Yahoo) and Steve Balmer (Microsoft) indicated, the increased scale will provide enough volume for advertisers to bid on both platforms.

But strategically, there is another positive aspect to the partnership, one that has not been discussed by either party (or third parties). Separate, both Yahoo and Microsoft are struggling a little in their own ways. In the search market, Yahoo has stagnated and Microsoft has not yet been able to capture significant market share. Microsoft is making one last big push now, with its Bing launch, to get that share, but without the merger, that posed a potentially dangerous outcome to both Yahoo and Microsoft. Why? Microsoft’s launch is backed by hundreds of millions of dollars of advertising money. But as we’ve discussed in prior posts, the more Microsoft advertises, the more news outlets, pundits, and bloggers analyze Bing with respect to Google. Only a small portion of the online buzz had been including Yahoo in those comparisons. Therefore, the major long-term result of that campaign might well have been BOTH Google and Microsoft taking share from Yahoo – not Microsoft taking share from Google.

That obviously would have been bad for Yahoo, but it would also have been bad for Microsoft. Even if Microsoft and Google together gobbled up all of Yahoo’s share (relatively evenly), Google’s share would have gone up from 65% to over 75%, while Microsoft’s share wouldn’t even reach 20%. Google’s added size would have made it that much tougher to compete against.

However, by entering the partnership, Microsoft’s and Yahoo’s shares will effectively be one combined share with no internal competition. That in turn frees up both parties to focus on Google instead of each other.

At Domus, we remain very involved in the news being reported throughout the industry.