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Fool if you think it's over
'Cause you said goodbye
Fool if you think it's over
I'll tell you why
~Chris Rea, Fool (If You Think It's Over).

Those two crazy kids, Microsoft and Yahoo! are talking again. I know. I know. You thought it was over. Everyone did. They had nothing left to say to one another, but you know how it goes. You go home. You cool off. You realize you were made for one another.

The fact is these two companies can’t live without one another and Google is the reason. Like the proverbial 10,000 pound gorilla, Google looms over this relationship like a bad ex-husband. And it’s not because Google cares about Yahoo!, it’s because Google has such overwhelming control of the online advertising market, that Microsoft has to do something drastic to get back in the game, and drastic in this case is spending in the neighborhood of $45M for Yahoo!.

BusinessWeek did a lengthy report in its May 9th issue called Inside Microsoft’s War Against Google, BW does a good job of stating just what Microsoft is up against here.

“It may be impossible to catch Google in search advertising. The company dominates the market, taking in 77% of the revenues from those little text ads that show up alongside the results for Internet search queries. Microsoft, after years of trying, is at 5% of U.S. search revenue, according to search marketing firm Efficient Frontier.”

On Yahoo!’s side, they are after all a public company and they have no real place to go. According to published reports, it could take several years to achieve a level of profitability that would even approach generating the kind of money they can get right now from Microsoft (and there is of course no guarantee it would ever happen). And when it comes to millions of dollars, shareholders tend not take that kind of thing lightly.

It may be that the matchmaker here ends up being Carl Icahn, of all people, who has brought pressure to bear upon the Yahoo! board by threatening to take over and have a shot-gun wedding with Microsoft. Faced with this, cooler heads have prevailed, and the two sides are talking again.

The latest word from Microsoft is that they are actually sniffing around a different deal, one that doesn’t involve taking over the whole company, but instead involves a joint venture around search ads, the very area, not coincidentally, that Google dominates.

While it's not clear if this round of talks will prove any more fruitful than the last, what is clear is that Microsoft and Yahoo! are back at the table and they need each other probably more than they each realize. The two of them together make a far more formidable counterweight to Google than the two of them as separate companies. All of the politics aside, the real danger here lies in Google (or any company) gaining an insurmountable upper hand in the competitive balance of the computer industry.

So let’s all encourage Microsoft and Yahoo! to kiss and make up and get back to the alter. After all, it’s in ultimately in everyone’s best interest, not just the two companies.

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