The top link on techmeme right now is yesterday’s post by Jason Calacanis titled “Yahoo committed seppukku today."  It is worth reading because it powerfully (and hilariously) lays out the position that handing over search to Microsoft is a huge mistake for Yahoo.  It is a position I am very familiar with, because I made much of the same argument (although in a less entertaining fashion) last May.  But it is more than a year later and I am not sure the logic still applies.

First, Yahoo has lost a ton of talent along the way.  Some of that talent went to Microsoft.  Most notably, Microsoft recruited Qi Lu, one of Yahoo’s key search engineers in December of last year.

Second, despite some slight gains in search share (from hovering just above 20% for most of 2008 to slightly above 21% in early parts of 2009), Yahoo’s search monetization has been falling.  In Q2 they reported a 15% decline in search ad revenues at a time when Google reported a 3% increase.

Third, search may simply not be a winnable category for some time for anyone other than the leader.  It is worth remembering that the arms race with the US was a key contributing factor in the demise of the Soviet Union.  So if you are Yahoo and you are behind and slipping (see first two points), do you really want to keep plowing money into search?  Might be smarter to let someone with deeper pockets wage the fight on your behalf and wait it out.

Fourth, the economics of the deal with Microsoft might be attractive.  On one hand, there was no upfront, but on the other there are a number of guarantees, such as "Microsoft will pay traffic acquisition costs (TAC) to Yahoo! at an initial rate of 88 percent of search revenue generated on Yahoo!’s O&O sites during the first five years of the agreement” and “Microsoft will guarantee Yahoo!’s O&O revenue per search (RPS) in each country for the first 18 months following initial implementation in that country."  Both of these are difficult to interpret since not enough detail is provided, but it sounds intriguing.

Bottomline is that in May 2008 I shared the same point of view that Jason published yesterday.  But at the end of July 2009 a lot has happened and now I am thinking this could actually turn out to be a smart move.  The initial reaction clearly suggested the stock market did not think so.  But this seems more like a knee jerk reaction to me.  I think it will be a couple of years before one can properly judge this decision.