Microsoft-Yahoo deal: a costly distraction?

The new Microsoft-Yahoo! deal is a win-lose agreement for the companies ... and, possibly, a costly distraction.

Yes, the deal announced early Wednesday allows Yahoo! to focus on its strength: selling online advertising. It also will give Microsoft's new Bing search engine nearly 30 percent of the online search market and a shot at competing with juggernaut Google.

But while Yahoo! consolidates and Microsoft plays catch up, what is Google doing? Working on the next generation of Android, its open-source operating system for smartphones.

If you were the business strategist for one of these companies, where would you see the most potential: search-related display ads or smartphones?

The first is a big moneymaker. Search technology may give Microsoft the edge it needs to compete in the fast-moving technology space. Here's how Business Week analyzed the Microsoft-Yahoo! deal:

Microsoft agreed to let Yahoo keep 88% of the revenue on ads that appear on Yahoo sites. But Microsoft will nevertheless reap a reward that's more valuable in the long run. 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.

That's a big advantage for Microsoft and no one can blame the software giant for focusing on where the money is now. But is search technology sufficient in the new high-tech landscape?

Look around you. Where are eyeballs migrating?

People already spend hours at work in front of desktops and laptops. But once the workday ends, they pull out their smartphones to do everything from texting friends to finding directions to a restaurant.

So far, people spend a surprisingly small amount of time with these gadgets. Even 18- to 24-year-olds spend five times as much time watching live TV (3-1/2 hours a day) as they do using cellphones/smartphones (43 minutes), according to a recent study. Look for that mobile time to increase as smartphones become more powerful and replace once-indispensable items, like cameras. (Tech writer Wade Roush is already logging the shrinking number of must-have products he uses.)

Even if Google has the right focus, it's not at all clear that its Android system can displace Research in Motion's BlackBerry or Apple's iPhone. Early winners in a high-tech niche usually have a big advantage. But Android could run past Microsoft's own competing Windows Mobile system.

And it could be that Bing is a stepping stone for Microsoft to capture the search market and ad revenue on mobile devices. But if the Yahoo! deal distracts Microsoft from smartphones, it will hurt the software giant.

On Monday, Microsoft announced a contest for developers to kick off its Windows Mobile app store. The top four winners will get one of Microsoft's new "table computers" – a prize Cnet called paltry compared with the $275,000 awards that Google was offering to winning Android developers.

If that's an indication of corporate commitment, it's not encouraging for Microsoft.

Search is great, but smartphone is the future.
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