• by Laurie Sullivan  @lauriesullivan, November 18, 2009

Microsoft and Yahoo could ink their Web search and ad agreement announced in late July by the end of the week. So says All Things Digital's Kara Swisher, citing sources close to the partnership. But as the deal gets closer to reality, it appears that red flags have begun to wave.

Ad industry executives had expected Microsoft and Yahoo to seal the deal in October. But when that date passed, industry insiders began to scrutinize the structure of the agreement and whether the real winner would become Google. The deal, however, remains subject to U.S. and European antitrust regulations.

Yahoo has several search syndication deals expiring now and during the next year, according to Didit CEO Kevin Lee. "With both Yahoo and its syndication partners being powered by Bing for paid and organic results, within the pending partnership, the real hurdle for Yahoo in this is how Yahoo can continue to deliver value as an extra layer for search syndication partnerships," he says. "Microsoft has good reason to try to establish those partnerships directly with publishers, without the Yahoo middleman."

Yahoo needs to find a creative way to approach the publishers when renegotiating deals. Without adding value, Microsoft will likely grab a significant number of search partners from Yahoo, Lee says.

It could mean the demise of Yahoo's syndication business. Although not a significant biz, Yahoo's syndication business focuses on monetizing search clicks through its ad platform on non-Yahoo properties. Microsoft also needs to beat Google at the game, which Lee says remains on the negotiating table with publishers.

The structure of the deal between Yahoo and Microsoft puts the Sunnyvale, Calif. company in a bad position, according to some industry insiders.

Investors are also a bit concerned about Yahoo's continuing loss of search query share to Bing. October's comScore data released this week indicate that Yahoo lost 80 basis points last month -- dropping the company's share of core searches to its lowest level at 18%, Bernstein Analyst Jeffrey Lindsey wrote in a research note published Wednesday. He believes Yahoo's 18% market share in search is worth $6 per share to investors.

Bernstein analysts share several concerns, but the firm's analysis indicates the loss of search share is not catastrophic. "Advertisers are waiting to see what will happen to the user-interface and the performance of the new combined business before committing significant new budget increases," Lindsey writes. "Ironically, the uncertainty of the limbo in the Microsoft deal may actually be driving more marginal advertisers toward 'market leaders' as Mr. Ballmer calls them, and away from Yahoo."