Update2: Om says it's all off, or possibly never on. Which reminds me, I predicted back at the start of the year that Microsoft would buy Yahoo! and, err, now they're not going to. So much for prophecy.
Update: numerous commentators are describing this as an opportunity for MSN/Yahoo! to combine a 27% paid search market share against Google's 65%. Sure, if those numbers described a stable market, but a year ago (Hitwise) Google stood at just 58% and the combined might of Microsoft and Yahoo! made for a slightly mightier 35%. In the UK the absolute figures are even more heavily weighted in favour of Google (HitwiseUK) - Google at 75% a year ago now stands at 79%, with MSN/Yahoo! down from 15% to 13%. We're not just talking about an alliance of two runners-up: we're talking about a alliance of two runners-up that are falling ever-further behind.
Original post: Rumours in the New York Post - and wildly unsubstantiated rumours at that - have Microsoft stalking Yahoo! at a price tag of $50 billion (a hefty premium on the current valuation, just before NYSE opens for the day, of $38 billion and some pennies). Reputable sources simply report that no-one at Microsoft is commenting.
If, just for the sake of argument, this was true, commentators are hoping that it would let Microsoft catch up with Google in the all-important paid search market, adding scale and the "real deal" that is the new Panama platform.
Perhaps not. A few years ago Forrester released a report entitled "Google UK's search dominance isn't a done deal" (sub req'd), which showed amongst other things that the longer people had been online the more likely they were to use Google. It's a well-known pattern - as people first came online they used whatever search engine happened to be on their ISP's homepage, then sooner or later found out that everyone used Google and did the same.
MSN has some interesting opportunities to corral inexperienced searchers onto its platform with its (decreasingly ubiquitous) browser, and Yahoo! continues to leverage its legions of webmail accounts...but Google has been writing its own gateway deals - for example with Dell - since last year and continues to gain market share.
The reasons for Google's dominance of the search market are complex and go beyond superior search technology into branding and the psychology of probabilistic systems (LongTail). Irrespective of the reason for Google's hitherto unstoppable rise, unless Microsoft and Yahoo! together have some genuinely new strategy to stop their own relative decline - and not just a rehash of the old peanut butter memo - there's no reason to imagine that tying them together will let them battle Google more effectively than they've been able to alone.