It seems that people on the outside looking in (not always the best source) think that Microsoft is quickly becoming a fiasco of a company. Microsoft has delayed Vista, done a drastic reorganization of its management structure, announced it is going to spend heavily to compete with Google and now Gartner predicts that Vista will be delayed again. In the midst of the mayhem the Wall Street Journal floated the idea of a Microsoft-Yahoo merger. While the market cap/cash on hand numbers match and there are a lot of synergies, I'm with John Battelle that this is a non story, but it clearly has people buzzing. It behooves Microsoft execs to look at all the options but buying Yahoo is not realistic. That said, it creates an interesting mental exercise to think about a partnership, and not necessarily a merger, would affect Rich Internet Applications for both companies.
Yahoo has been the darling of venture capitalists everywhere hoping to cash in on Web 2.0. The company has been on a spending spree and has purchased some high quality web applications including Flickr and del.icio.us, two Web 2.0 stalwarts. Microsoft on the other hand has seen the impending threat from Google and has thrown money and energy into Windows Live and Office Live, both brainchildren from the school of software as a service. Yahoo has, in many ways, become the king of content. People post and tag pictures to Flickr and are also busy tagging their favorite parts of the web in del.icio.us. If Microsoft could provide some robust tools, via Avalon, that allowed users to access their content from almost anywhere, then that content becomes much more valuable to its owners.
Everyone has focused on the search aspect of a possible Yahoo/Microsoft merger, and that is definitely where the bread and butter of this doubtful merger lies, but the implication for internet applications could be huge. Richard McManus, my cohort here at ZDNet has been following the web office, and I think the kind of content that Yahoo has fostered the creation of would provide Microsoft some big time ammunition in many of their initiatives. The hard part is making that content a value added part of their RIA initiatives and that's something I doubt Microsoft can accomplish.
While it's fun to speculate, I would be absolutely flabbergasted if Microsoft bought Yahoo, but a working relationship has a ton of potential.