Editor’s note: Allan Krans, a senior analyst at Technology Business Research, likes what he sees in the deal announced Wednesday between Microsoft and Yahoo!

By Allan Krans, Technology Business Research

HAMPTON, N.H. – For all of its investments in search and advertising Microsoft never filled a gaping hole in its strategy, which is an inability to get people to use the technology.

Through billions in investments, Microsoft (Nasdaq: MFST) bought and built all of the technology and data center capacity it needed to support the online marketplace that is search and advertising. However, with less than 10 percent of internet searches going through the Microsoft platform, its marketplace was empty.

A lack of search volume is not a trivial problem; it’s the fundamental flaw that is preventing any success of positive financial return from the business. Microsoft recognizes this, and is leaving no rock unturned in solving the issue.

In addition to flat out paying customers to use Microsoft product search, its desire to increase search volume was so strong that it was willing to pay more than $45 billion to purchase Yahoo! (Nasdaq: YHOO) less than one year ago.

Best Shot for Success

Microsoft’s release of Bing is being positively received by consumers, but is not sufficient to span the vast chasm Google maintains in the search market. With Microsoft starting from less than a 10 percent share of search, and Google maintaining around 70 percent, it would take years for Microsoft to build any serious presence in the market.

While Google’s share of the market and hold on consumers is formidable, Microsoft’s advertising deal with Yahoo! may be the best shot at succeeding in the market. This deal will instantly triple Microsoft’s share of the search market, providing the scale to attract a greater advertising base, creating the possibility to monetize its search and advertising assets for the first time.

Microsoft Gets Its Milk without Buying the Cow

The deal is a clear win for Microsoft, which receives the search volume it needs, without the risk and expense of a full acquisition of Yahoo!, all for a fraction of the proposed acquisition price. The deal may not address the display advertising business, but it delivers a targeted benefit to Microsoft’s most challenged online business, search advertising.

In hindsight, the failed $45 billion bid for Yahoo! may seem like a blessing, as Microsoft avoided both a large financial outlay as well as the myriad of issues that would have been faced integrating a purchase of that scale. Microsoft experienced difficult successfully integrating large acquisitions in the past, and the purchase of Yahoo! would have presented a significant and likely a costly challenge.

Taking the operating income benefits estimated by Yahoo!, this deal will cost Microsoft between $500 million to $1 billion annually, which pales in comparison to the proposed acquisition price, and is not significant given the spend rate in Online Services is already approaching $6 billion per year.