Bartz Puts Yahoo! in Ballmer's Court

With online ad spending falling, search volume declining and ad prices dropping, Yahoo! faces a difficult year on the search front. One quick remedy to the high costs of staffing and operating a search ad delivery network is getting someone else to do it. Yahoo! could cut a big portion of its operating costs if Microsoft handled the freight and shared the take with Yahoo!

Meanwhile, Bartz could attempt to reinvigorate Yahoo!'s slumbering display ad business.

"Yahoo's graphical ad customers are the cream-of-the-cream," says one former Yahoo! employee who now works on the buy side. "They have the scale" in display to be able to work with the buyers, maybe dropping unit prices in exchange for more volume, says the analyst. "In a tough environment, they could maintain and even gain market share."

For Microsoft, which faces a steep erosion of its PC software franchise with the rise of Window's-free netbook computers, the Yahoo! search deal would put the software shop a big step closer to the online market. Previous efforts by the Redmond, Wash., tech giant -- WebTV, Hotmail, .Net etc. -- haven't exactly been soaring successes.

In a telling move last week, Microsoft won a key spot in mobile search in an upset victory over Google. Microsoft outbid Google to land Verizon Wireless' plum search slot on cellphones.

Adding Yahoo!'s mobile search traffic to Microsoft's Live effort would be create a far more formidable competitor to Google. And that, of course, is what all this is about.