For a few minutes I thought I was reading about AOL buying Time Warner.

When I first saw the news about Microsoft bidding on Yahoo, that was my first thought—you could play Mad Libs with this deal and it would make just about as much sense. Microsoft and Yahoo couldn’t be more different: one is a company that sells software for your computer, and the other is a company that gives away Webware, mostly for free, in exchange for advertising revenue.

On some level Microsoft’s mega-money $44.6 billion bid vindicates what I’ve said in private for years about Google, that the smart money is on giving away software and making your money on hardware or advertising. But at the same time, Microsoft buying Yahoo to gain a foothold in the paid-advertising market online is disturbingly reminiscent of AOL’s purchase, or for that matter the Tribune—Times-Mirror merger in 2001. The logic behind these deals always sounded to me like, “We lack X to fill out our business model; Y has X; therefore, we’ll buy Y to get X.” The AOL–Time Warner and Tribune—Times-Mirror mergers were designed to tap into “synergies” between the Internet, broadcasting, and publishing worlds, but they’ve both failed because there was no such synergy.

Now, for another analogy on the Microsoft-Yahoo deal: remember when Microsoft bought Hotmail? I’m still not sure what it bought them circa 1997, other than a massive userbase and a small ad revenue stream. Then, they spent seven years redeveloping it, and letting the current version stagnate. It’s now part of the Windows Live suite, but in the process of all of this redevelopment Redmond lost sight of the big picture. I don’t have access to these numbers, but I wouldn’t be surprised if the growth in Web mail market share is mostly contained to Yahoo and Gmail. Microsoft has a very large base, and I’m sure that provides a healthy revenue stream, but that’s not a good weapon going forward.

So far, Yahoo is resisting being bought. Who knows what the future holds? I have no idea whether the deal will go through, but its implications are huge.

But enough on my opinion—I’m hardly the only one with one. The BBC’s Tim Weber kicks it off by saying he thinks this is Microsoft’s attempt to strike back at Google:

Microsoft has watched Yahoo’s struggle closely, and seen the writing on the wall. As Google has grown into a billion dollar business, it has increasingly strayed into Microsoft’s territory, competing not just for advertising revenue but rivaling core Microsoft products like e-mail and word processing.

[…]

Making the offer is an admission that Microsoft’s management has been scared by the success of Google.

The bid is also an acknowledgment that its numerous attempts to become a dominant Internet content provider have failed.

But to make it pay, Microsoft will have to demonstrate that the combined company can offer a superior business model.

And on Weber’s side is no other than AOL’s Randy Falco, irony of ironies, who told AdAge he thought the deal was a bad idea. “I think it’s a mistake,” he said. “But I think Napoleon said never interrupt your enemy when they’re in the middle of making a mistake.”

On the other hand Weber’s BBC blogger colleague Darren Waters disagrees with his analysis. “[T]his is about gearing up for the second Internet age,” he writes, and Microsoft simply can’t compete at all with their current offerings. Buying Yahoo gives them an entrée into social networking, instant messaging, and online advertising markets where their toehold is almost meaningless.

So what’s the problem?

Well, the question is what Yahoo can offer Microsoft, and whether Microsoft can make use of it. John Gruber is compelling when he says he thinks that the deal will destroy Yahoo if Microsoft operates like Microsoft rather than like Berkshire Hathaway, and ponders how they could be more like the Sage of Omaha:

Here’s Dan “Fake Steve” Lyons’s analogy: “It’s like taking the two guys who finished second and third in a 100-yard dash and tying their legs together and asking for a rematch, believing that now they’ll run faster.”

That pretty much summarizes the Microsoft-being-Microsoft route—in a word: assimilation. If they try this with Yahoo, they’ll choke. Yahoo is too big, and too different, to be absorbed into Microsoft.

But what if Microsoft does the unexpected and keeps Yahoo separate and distinct? On a vastly smaller scale, that’s what Microsoft has done with its Mac Business Unit.

[…]

Keep the Yahoo brand along with all of Yahoo’s successful products—and product teams—intact. Commission one or two high-profile new Yahoo endeavors. The first should be to have the Flickr team do for video what they’ve done for still photography. (Why Yahoo didn’t do this immediately after acquiring Flickr, instead choosing to stand on the sidelines playing pocket pool while YouTube swelled into a multi-billion-dollar product, is a mystery for the ages.)

Let Yahoo continue to choose and create their own server and software development tools. Yahoo knows as much about high-capacity Web scaling as any company in the world. That they’ve built their architecture around Linux, BSD, Apache, MySQL, and PHP—not a whiff of Microsoft technology—is a strength, not a weakness. Allowing Yahoo to keep this architecture isn’t just essential in terms of keeping existing Yahoo engineers happy, it would also greatly expand Microsoft’s overall corporate expertise.

If that happens, I think everyone from Fake Steve to even me can imagine how Microsoft could make the deal work. But can Microsoft? I doubt it. I can’t wait for the new, rebranded, Microsoft software-supported Windows Live Photos Desktop .Net Home Personal Photographer Edition Online and Windows Live Link Tagging and Search Service .Net Home Online Special Edition, a.k.a. flickr and del.icio.us.

Moving on, Tristan Louis considers how the deal might change the Internet landscape, if it goes through. He says OpenID, AT&T, and AOL are winners, and some of the losers include advertising buyers and News Corp. It’s a good analysis, and persuasive. And Tectonic’s Alastair Otter agrees, saying the big question is what the possibility of a near-monopoly on Internet advertising could hurt the industry. Otter writes, “Microsoft and Yahoo together control an estimated 20–24 percent of the global search advertising market and 30 per cent of the online display market, according to an FT source.” (One caveat: I’m not sold on the advertising question. With this deal, ad agencies could centralize their buying and extend their reach greatly. And they can bargain on price, because there’s still Google.)

Michael Arrington of TechCrunch ponders what Yahoo can do, if they reject the deal. He says, “Yahoo was hoping for a competing bid, any competing bid, if only to boost Microsoft’s offer to the $40 range.” But there’s no such bid, and he thinks that all that is left is that either Microsoft will buy Yahoo or Yahoo will collapse on its own one way or another. Arrington says they’re no longer the giant they once were, and that torch is now Google’s.

And Jeff Jarvis gets the last word: he thinks this is a deal of the dinosaurs. “It’s appropriate…that Yahoo is being bought by what one could say is the last old technology company, Microsoft,” Jarvis writes. “Will this be big enough to beat Google? No, because big won’t win in the end.”