Yahoo On Sunset Boulevard

Yahoo’s search deal with Microsoft is the Internet’s version of Sunset Boulevard, with Yahoo as the downtrodden young writer and Microsoft as the aging actress with whom he hooks up, giving him access to her wealth and Bing (I mean bling), but confining him to a hopeless future.

In case you haven’t seen the details, ReadWriteWeb has an excellent summary of the deal, concluding that

At its core, this agreement means that Yahoo has given up on its search engine business. Microsoft will be able to increase its market share in the search engine and search advertising market. Yahoo will receive revenue from Bing searches generated on Yahoo’s sites and become “the exclusive worldwide relationship sales force for both companies’ premium search advertisers.”

My colleague Erik Sherman shows quite smartly that the deal could be worth some $700 million annually to Yahoo’s bottom line, which is nothing to sneeze at.

Given the company’s revenue in recent quarters, that could be roughly equivalent of adding a full 10 percent to the bottom line, which is major. Of course, that’s assuming that the $500 million number is actually additional.

But this isn’t a lifetime deal, and if Microsoft decides ten years is enough, Yahoo will be at a loss for revenue growth, technology and an identity to sell to customers.

Yahoo is essentially abnegating the ongoing development of search technology to an organization it doesn’t control (and which could be a potential future rival to boot). No wonder IDC analysts Sue Feldman and Karsten Weide called the deal “strategically unwise for Yahoo,” in an email.

There is no way back from this deal: Once search is outsourced, it will be almost impossible to bring it back in-house. Should Microsoft lose the race against Google in terms of search relevance and ad placement technology, Yahoo’s ship would sink with Microsoft’s.

In addition to giving up on search technology, Yahoo also loses the lifeblood of any business-to-consumer company: customer data, as BusinessWeek quotes Search Engine Land’s Danny Sullivan.

The data on computer users’ online search and buying habits would ultimately reside on Microsoft’s computers, thereby improving its ability to automatically serve up the most relevant ads. “If Microsoft is running the underlying ad technology, it doesn’t matter who is selling the ads,” Sullivan says. “In the end, Microsoft will hold all the cards.”

Mr. DeMille? Microsoft is ready for its close-up.

[Image courtesy of the Roxy Theatre]