Two Other Reasons

I have thought of two other reasons why Microsoft would be interested in buying Yahoo - things I simply haven't yet heard in the endless speculation.

Server Farms
This is pseudo insider information. When I was up in Redmond last fall, Microsoft was seriously hard up for server farms. Internal projects that had been working for months would be ready to roll out into production and suddenly people would find their projects facing no-go decisions because there are simply not enough servers to go around.

How does a company the size of Microsoft run out of server farms? It's complicated, but the short answer is that Microsoft internal security is extraordinarily demanding on end-users. Remember what Schneier said about benevolent worms? This is essentially what MS does to everyone on their intranet - they use benevolent worms to keep everybody on the inside inoculated and safe from the barbarian hordes who obviously want to hack Microsoft.

The other insider bit of info I happen to know is that Microsoft has initiated a new capex system to manage their current server farms better, and this plan is due for a major expansion. So if you were an internal client to the service that doles out servers you get a bill from this internal group. That particular internal group is expanding their capability to manage server resources by a factor of about 20.

The addition and annexation of Yahoo server properties and management would be a huge boon to Microsoft which is rather behind the 8 ball internally and acutely aware of a need to expand. There's a new high tech colocation facility in Seattle, I forget the name of it, but people talk about it in hushed tones - and they are booked to capacity out a year. Nobody has the state of the art server farms that Microsoft needs right now, and I'm sure that is a strategic necessity for them.

Hotmail + Yahoo Mail = Giant Captive Audience.
Sometimes it's just that simple. Microsoft wants the eyeballs. Forget search, just think assets and alliances but focus it on the Yahoo customer. I would probably never think of Microsoft if I wanted to get DSL, but I'd think of Yahoo.

Yahoo's customers - the people who use my.yahoo.com and maybe host their homepage at Yahoo, have been around for a long time, and from what I infer from my own high tech crowd, are not the same class of users who would do that MSN butterfly browser thing. In other words, they are a more upscale demographic in terms of their likelihood to purchase additional services, whereas your MSN and AOL guys are just passive eyeballs.