Disclosure:  I don't own shares in Microsoft or Yahoo (yet).

Maybe I'm missing something, but I really think the Microsoft-Yahoo search deal makes a ton of sense for both companies.  I was very surprised to see Yahoo's stock take a huge hit in the days following the deal.  Maybe it's a case of "buy the rumor, sell the news".

As a result of the deal, Yahoo gets out of the "search technology" business altogether.  This is a cost center that was a losing battle for Yahoo in my opinion — going up against Google and Microsoft is and always will be a losing proposition for most large companies.  Besides, it isn't Yahoo's primary business.  Today, Yahoo is in the business of operating a large network of web sites with tons of users.  And although they run the risk of becoming the "next-generation AOL", that isn't necessarily a bad place to be.  There is a lot of money to be made in the long-tail of Internet users who don't use the latest, greatest Web sites and services.  The most interesting part is that Yahoo retains 88% of revenue by partnering with Microsoft on search technology.  As Ballmer said last week (paraphrasing), Yahoo stays in the search business and retains 88% of revenue with no COGS and no R&D.  Not bad for Yahoo at all IMO.

Microsoft gets several things out of the deal.  They learn by getting a ten year license to Yahoo's search technology.  They also all but kill Yahoo as a search technology competitor… ten years from now, search will have evolved significantly I'm sure.  Old, unmanned technology is pretty much useless.  Bing gets adopted by a much larger customer base — so Microsoft is effectively buying market share.  Finally, Yahoo will serve as the worldwide marketing and sales force for Microsoft AdCenter and the combined search advertising offering.  This is an area that Yahoo really knows well, certainly better than Microsoft.

Overall, I like the deal for both companies because each get to focus on their core strengths.  There are certainly some efficiencies gained from the deal that both sides will enjoy as well — you have to figure there is cost savings coming for both companies now that they are working together.  As with any partnership, the key is going to be in the details of how two self-interested companies manage to work together not when executives deal, but when middle-management makes decisions in real customer scenarios.  And can the two companies act quickly to capture emergent opportunity.  If it is relatively clean, I think this will be better than "two dogs getting together".  It will be a significant change to the landscape of internet marketing.