The successful launch of Microsoft's revamped search engine, Bing, was likely the event that tipped the scales in favor of Yahoo agreeing to a search deal, analysts said.
When Microsoft relaunched Live Search as Bing early last month, the company gained some early ground in search, mainly at the expense of Yahoo, according to analysts' statistics.
That early momentum showed Yahoo CEO Carol Bartz that Microsoft could create a search engine that was capable of drawing new users, and that it would benefit Yahoo to take advantage of the technology, said Neil MacDonald, vice president and distinguished analyst at Gartner Group.
"I credit Bing for being what tipped the deal finally over the edge," he said. "Microsoft has shown they can actually do something that has a chance of reversing the slide of both Yahoo and Microsoft against Google."
Microsoft and Yahoo have been losing ground to Google for some time in search queries and search-based advertising. But it took the companies more than a year to hammer out Wednesday's agreement about how to unify their search businesses.
Under the terms of the 10-year deal, Microsoft's Bing search engine and adCenter platform will power Yahoo's search-based advertising business, while Yahoo's sales team will handle both companies' premium search customers.
Bartz complimented Microsoft on its Bing technology just last week, on a conference call to discuss Yahoo's second-quarter earnings.
"I think Microsoft should be given kudos for Bing; it's a nice product," she said, adding that it was too early to say if people are visiting the site out of curiosity, or if it will help Microsoft to increase its market share over the long term. Microsoft and Yahoo were said to be close to a deal at the time, but nothing official had been revealed.
Though Bing seemed to be a major revamp of Live Search, it consisted mainly of features that had been in Live Search for a while, with some algorithmic and user-interface changes being the main differences, said Matt Rosoff, an analyst with Directions on Microsoft.
The problem was, not a lot of people used Live Search or knew about those features, and the rebrand was Microsoft's way to draw attention to the product, he said.
Bing and the marketing efforts around it have done just that, and early reviews indicate that the new search algorithms are an improvement not only on what Microsoft had before, but also on Yahoo's search engine, Gartner's MacDonald said.
Aside from being good technology, Bing also proved that Microsoft was serious about its investment in search, he said. That likely encouraged Yahoo to give up its search investments in favor of Bing so that it could focus on delivering better online content via its portal to drive online and display advertising.
"I think [Bartz] took a long, hard look at what is Yahoo, and what makes Yahoo distinctive doesn't change," MacDonald said. "The engine underneath isn't Yahoo."
If Bing delivers better search results, he said, it bodes well for Yahoo's ambitions to become a premium destination for online content and to bring more users to its portal.
Yahoo's search direction has been unclear for some time. While it has invested billions in that part of its business with acquisitions of Inktomi and Overture and its own development of search assets, it has never seemed entirely sure whether it wanted to go head-to-head against Google, Rosoff said.
Wednesday's deal shows Yahoo finally made the decision to move ahead as an online portal rather than a search company, he said.
"It was just a matter of deciding whether Yahoo wanted to really be a search company and invest in that area, or wanted to be more of a portal," Rosoff said. Search is Google's core business, he said. "That's what they've always been about. Yahoo's always gone back and forth."
Though abandoning its search efforts may look like a loss for the company, it's likely that Yahoo's search technology -- which Microsoft will now have access to -- factored into the economics of the deal, he added.
"They had something that Microsoft wanted," Rosoff said. "They're not just giving it up. But it does mean that they're not going to invest in their own search technology anymore."
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