In July, Microsoft and Yahoo finally announced a long awaited deal that will give Microsoft a better footing to take on Google’s dominance in Internet search and help Yahoo return to profitably. In the 10 year deal, Microsoft will handle all of Yahoo’s search inquiries, while Yahoo will sell the ads associated with the search results.

Although Yahoo investors seem to be disappointed that they didn’t get a
“boat load of money” on the deal, the resulting cost savings are hard to ignore. If and when the deal goes through, Yahoo is expecting to save $500M in annual operating expenses and $200M in capital expenses. They also expect to add $275M to its annual operating cash flow.

Prior to the deal being announced, Barron’s magazine had highlighted Yahoo on their main cover of the June 22nd issue. Even though the new deal is a big game changer, I still believe some of the arguments presented in the article holds true. For one, Carol Bartz, who is the new CEO and was credited with increasing the annual revenues at Autodesk fivefold at her previous tenure.

Yahoo generates 88% of it’s $7.2 billion dollar revenue from marketing services. Does it really matter who is providing the search technology…

Microsoft is also poised to benefit handsomely from this endeavor. I feel the biggest concern for them in the Internet search business is that Google’s dominance has allowed them to invest in other projects, recently even into operating systems, Microsoft’s bread and butter. To slow Google’s investments into these areas they must cut off their main source of funding by gaining market share in the search arena.

But even without this deal, Softie is overdue for a bounce. The Windows 7 operating system has been getting some good pre-release buzz and is set to hit the market in the next few month. New developments in their windows mobile software, app store and even a new HD Zune player. Microsoft seems to make some smart moves in the right direction.

Ok, so Yahoo is going to save a lot of money and Microsoft is finally getting their chance to become a real competitor in the Internet search business. Even Google might benefit if the deal manages to keep the US Justice Department off their backs for “anticompetitive actions”.

So how does that benefit the rest of us? Well I think you’re going to see much more money flowing into search technology so that we can find what we’re looking for faster. Already we’re hearing about how Google is upgrading their search technology, code-named Caffeine.

Although there isn’t much you can do about ad prices since they are set through auctions, I believe that the competition between the 2 rivals will create greater incentives for users of the search engines and vendors who are placing the ads. Microsoft has already been offering people cash-back incentives for Bing Searches. Everybody may end up coming out ahead from Microhoo, but seeing as they still have to pass some anti-trust hurdles it may be some time before we know how this deal plays out