As Yahoo and Google get ready to finally launch their search partnership--and trigger a storm of legal and industry protest by doing so--it's worth revisiting Yahoo's decision to pursue this deal instead of one with Microsoft in the waning days of the Microsoft-Yahoo dance (boy, does that seem like a long time ago).

In the days when Google and Yahoo first announced their search partnership, Yahoo's stock was in the high $20s, and the Microsoft acquisition at $31 seemed inevitable. Then Jerry pulled the Google deal out of his hat, and this forced Microsoft to halfheartedly throw a couple more dollars a share at Yahoo. But the intransigence at Yahoo quickly killed that $33 bid, Microsoft walked, and now we're back below $20 again.

If the Google deal isn't quashed by regulators, it could be very successful. It could allow Yahoo to generate incremental revenue and cash flow and, ultimately, begin to reduce engineering spending on search--a war it has long since lost. But this still doesn't mean going with Google instead of with Microsoft's last offer to buy Yahoo's search business was the right decision. If Yahoo's query share continues to drop--which it did last month--it will become ever clearer that the company should have taken Microsoft's money and run.

As is clear in the chart below, Yahoo has lost almost 2 full points of search share since January and now holds under 20% of the overall search market. This is a continuation of the relentless share loss trend since Google burst on the scene seven or eight years ago.

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If Yahoo continues to lose share--and there's no reason to expect it won't--the Google deal will rapidly become less and less relevant. It doesn't matter if you "improve monetization" of queries if your share of queries continues to shrink.

As you'll recall, in the waning days of the Microsoft-Yahoo dance (round one), Microsoft made two offers to buy Yahoo's search business to try to detail the Yahoo-Google search deal. The first one was weak, and Yahoo was right to reject it. The second one, however, was much closer to a reasonable deal. If Yahoo had engaged with Microsoft on that offer, it's possible they could have gotten to a deal that made sense.

A strong search deal with Microsoft would have allowed Yahoo to:

• Stop shoveling hundreds of millions of dollars a year down the Panama (search platform) rat hole
• Focus all its energy on what it's best at: content aggregation/production and display ads
  
• Continue to generate meaningful revenue from search while its query share lasted.

Yes, shutting down Panama would have closed the door on Yahoo's ability to bring search in-house again. But unless the company finds a way to turn around its eroding share, this just doesn't matter.

Yahoo's stock accomplished the near-impossible on Friday--declining almost 5% on a day when the market was up 400 points. Most likely this was because investors continue to realize that, Google deal or no, Yahoo's search business is headed down the tubes.

See Also: Details on Microsoft's Second (and Better) Search Offer