I don’t know if Yahoo killed themselves with the Microsoft search deal or not, but I do know the following:

1. Yahoo is better off without search.
2. Microsoft can’t beat Google at search.

Yahoo is better off without search.

One of the biggest complaints about Yahoo has been their lack of focus and identity.  Are they a search company or a content company?  Well, now it’s clear: Yahoo is officially a content company.  That’s a hugely positive step, and I think it’s the right choice, because Yahoo has never really been a search company.

A search company does two things: develop the best search engine and provide the best search advertising platform.  If BOSS and Panama, respectively, were Yahoo’s best efforts to date, then Yahoo (as a search company) could never catch Google without a serious shift in focus.  As it stood, search would continue to be underinvested and undermonetized, and Google’s shadow would still loom.  That kind of burden impacts your strategy, your hiring, your morale, your confidence, your ability to run the company.

Now, that’s not to say that search isn’t a hugely important business.  As Jason Calacanis said, “search is the most important business of the 21st century.”  However, just because search is huge, that doesn’t mean that Yahoo is required to build their business around it.  By outsourcing search, they can still monetize their audience through search without the burden of being Karl Malone (or Ewing or Barkley) to Google’s Michael Jordan.  You might not agree with the choice of target (search vs. content) or the execution (this deal), but at least there’s a target now — that’s the most important thing for Yahoo at this point.

Microsoft can’t beat Google at search.

Classic innovator’s dilemma here: Microsoft’s primary business is desktop software, while Google’s is search.  When it comes to giving searchers the best results and building the best search advertising platform, Google will always always always win.  They have no choice: their entire business (well, 97% of it, anyway) is predicated on delivering these two things.  On the other hand, Bing is just a project within Microsoft.  Even if it delivered horrible results, Microsoft would still keep it alive.  That’s not how you force innovation to happen.

The only real way that Bing would have a chance to beat Google would be for Microsoft to spin it off and make it fend for itself.  If Bing had to live and die on its own, it would be forced to figure out how to win.  However, I’m pretty sure that we will never see this happen.  As poker pro Amir Vahedi put it, in a poker tournament, “in order to live, you have to be willing to die.”  I don’t think Microsoft is willing to let Bing die.

One other long-term thing: as Microsoft mounts an attack on Google in search, Google is counterattacking on the OS front.  As the desktop goes mobile and Windows becomes less and less relevant, Microsoft better make sure that they have a foothold in smartphones, netbooks, etc.  I’d be concerned, since Windows Mobile has all but dropped off the map.  Google has to fend off Bing, but Windows is getting eroded from all angles.  Microsoft should watch their back…