Most of the commentary about the possible Yahoo Microsoft merger from inside the internet community is very skeptical of the prospects of a merger, where most of the investment commentary from Wall Street seems to be positive although Microsoft shares lost enough value that clearly the broader investment sentiment about this is negative.

I’d suggest that Robert Scoble is right, and the Yahoo Microsoft deal is probably a good idea. Although Yahoo is in some ways a different culture from Microsoft, It seems to me that both of those corporate cultures have become bureaucratic, sluggish, and uninspired when compared to Google’s freewheeling yet very productive approaches. However, the majority of the thousands of Yahoo and MS employees are very impressive individuals, and certainly capable of great things as the online world is reinvented on a regular basis.

If Microsoft can pool the innovations of their excellent online efforts in the LIVE project with Yahoo’s superb developer support programs, and hire and inspire more people to have the evangelical zeal of Googlers, it could be a whole new online ballgame.

A big reason this could make sense for Yahoo and Microsoft is the online math. The traffic from Yahoo+ Microsoft is very substantial. By many measures Yahoo actually has more total traffic than Google already - it just does not have as much of the lucrative search traffic and does not monetize the traffic as well as Google. With Microsoft traffic, the combined Yahoo Microsoft company will still initially lag Google in search traffic, but it will have *far greater* total web traffic.

A fear of lawsuits over browser manipulations and lack of interest in what for Microsoft was a small revenue source led them to failure in the search business. Although the LIVE project was inspired, search share still lags so far behind Yahoo and Google that rolling all this into Yahoo search makes a lot of sense if Microsoft want a a piece of the online action they now see as critical to their success. The combined company would control an enormous share of global web traffic, and it won’t take too much imagination or innovation to redirect this traffic more profitably than now.

Microsoft remains the overwhelmingly huge legacy player in the information technology space. Google is the clear leader as the new player. Can Yahoo inject enough energy into the monstrous Microsoft machine to compete effectively in the online space? I think there are many potential pitfalls, but on balance you need to do the math, which says that in online footprint, content, and market capitalization:
Microsoft +Yahoo > Google.

News release from Microsoft

Disclosure: I’m a Yahoo Shareholder