Can Yahoo survive its deal with Microsoft?

While the pact between the two technology powerhouses promises to be a boonfor Microsoft as it takes on Google, it has left many insiders wonderingabout Yahoo’s future.

By , Staff writer

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    Yahoo Chief Executive Carol Bartz (l.) and Microsoft CEO Steve Ballmer smile at Yahoo headquarters in Sunnyvale, Calif., on Wednesday.
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Microsoft grabbed the No. 2 position in the lucrative world of Internet search engines in its deal with Yahoo announced Wednesday. But can Yahoo survive without search?

Once the king of Internet queries, the Sunnyvale, Calif., company has given up on the search business to focus on enriching its roster of websites and making the site the “center of people’s lives online,” according to Carol Bartz, the company’s chief executive officer.

By handing over its Internet search capabilities, experts say Yahoo has given Microsoft the keys to one of its most important assets. While Yahoo trails Google in market share of Internet searches, it still commands 28 percent of all search traffic. That’s not bad in a business that brings in $12 billion annually.

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The deal has its risks. Not only does it have to satisfy federal antitrust regulators but it has to please investors and, perhaps most importantly, millions of Yahoo users. Bing is new and relatively untested. While it has been met with positive reviews so far, if users are unhappy with a Yahoo search "powered by Bing," they could quickly hop to Google.

As for Yahoo, it can’t do without search, says Jason Calacanis, the founder of Mahalo.com and the former general manager of Netscape.

“The once proud warrior of the Internet space laid down its sword, knelt at the feet of Microsoft, and gutted itself today,” he wrote in a blunt assessment of the deal on his blog. “Ultimately Yahoo will look back at this moment as the second – and perhaps fatal – mistake in their epic history.”

Yahoo’s Ms. Bartz has countered that the search agreement with Microsoft will allow it to focus on improving its other properties – such as Yahoo news and finance. Moreover, the company has seen its share of shake-ups in recent years and ad revenues have slid. In short, perhaps this deal was what Yahoo needed to shake off its stale image in the fast-moving online marketplace – where brand loyalty lasts only until the next best thing comes along.

Other big Internet players have handed off their search capabilities in the past to disastrous results, points out Danny Sullivan, editor-in-chief of the industry news site Search Engine Land. In an article following the announcement of the deal, he noted that AOL and Lycos saw their traffic drop after they gave up their search technologies.

“Perhaps [Yahoo] will surprise me and be a long-time search player — a place where substantial amounts of searches happen,” he wrote, adding, “Part of me hopes it plays out that way, if only for nostalgic reasons.”

In an interview, Mr. Sullivan said it was hard to know exactly where Yahoo will now focus attention to retain loyalty as it faces competition not only from Google but also from social networking sites like Facebook and Twitter. The best thing they can do, says Mr. Sullivan, is beat Google and Microsoft on everything other than search.

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