After all the excitement and press releases about the search deal between Microsoft and Yahoo, the serious market analysis is now beginning. US regulators have decided to scrutinize the deal, to understand if the reduction of the number of major search providers, from three to two, will hurt competition in the search market.

Regulators will likely first look at if this reduction will hurt advertisers, since there will be fewer search advertising options. Google's advertising prices have soared as search advertising has become a basic part of general advertising campaigns, and fewer competitors could leave advertisers with few options and an extreme price increase in the market. Further, Google may not feel the need to innovate if Microsoft's search technology does not turn out to be effective and successful.

Some analysts feel that the US regulators will require the companies to sell Yahoo's search technology and infrastructure, so that a new competitor come into play and preserve competition. As the search market has matured, it has developed high barriers to entry, and the likelihood of new significant competitors is becoming more unlikely. Serious technological innovation and infrastructure investment are now required to be a player in the market. However, with Yahoo's assets, a new provider might have a better chance at getting a hold in the market.

During the review process, Microsoft will likely argue that the merger is necessary for them to stay competitive with Google. Google's market share has been steadily increasing, and it would still be much larger than Microsoft/Yahoo after the deal. However, because of Microsoft's significant resources, this may be a hard argument to sell, particularly since they were able to create Bing on their own, and since they have been fairly successful in gaining search market share since Bing's introduction.

If the regulators do force the sale of Yahoo's search assets, the big question will be whether Microsoft will accept the entry of a new major player that uses Yahoo's technology. This could lower the value of Yahoo and cause Microsoft to reevaluate the deal.

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After months and months of merger and acquisition talks with Microsoft and Google, Yahoo has finally reached a deal to merge their search and search advertising functions with someone – Microsoft! The deal will last 10 years, and “Microsoft will now power Yahoo search while Yahoo will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers,” according to the companies. Further, Yahoo will get 88% of the search revenue for the first five years, which is higher than the 60% or so that is typically given in these types of deals.

To some Yahoo supporters, the deal may be disappointing, because it is much less lucrative than the $44 Billion buyout of Yahoo that Microsoft attempted last year. The companies announced that the new deal will likely lower Yahoo’s costs and increase their profitability, but it may not have a huge impact on their revenue. The cost reductions
are due to the fact that Microsoft will absorb all of the search technology development and infrastructure costs. However, Yahoo will lose the chance of having a distinctive competence in search, the most lucrative area in internet advertising.

Yahoo will now be able to focus on the portal content and display ads areas, which they are a leader in now. However, this has not been a recent growth area for the industry. AOL has focused on these areas in recent times, and the results have not been pretty.

For Microsoft, this deal will allow Bing to gain market share, and it will possibly cause Bing to become more prominent in the eyes of users. Further, the deal eliminates one of their main search rivals. As Bing receives more traffic, it will also allow Microsoft’s engineers to improve its engine at a faster rate.

The deal will need to pass regulators, who did not look favorably on the recent potential Google/Yahoo deal. However, even combined, Microsoft and Yahoo will have a share in the search market that is less than half of what Google has. The companies hope that the deal will be quickly approved and that the merger will start in early 2010.

The next exciting step will be to see the reaction of the industry leader, Google. They may try to step up their search offering, and they may try to influence the decision of the regulators. More on this to come…