Microsoft wins by traction, the art of the foist, always tied to the PC (Windows) or tied to a bundle tied to the PC (MS Office). The XBox is the one exception I can think of where people went out and bought their product because it was really good (vid. Zune). The success of Windows-based PDAs and smart phones is an extension of people's use of Office/Outlook and thus an extension of Windows' PC base. Right now, Windows is infrastructure. It's everywhere: in business, in almost everyone's home. It's like asphalt: poured out, steam-rolled, and solidified into semi-permanence, and as in Baltimore, where I live, given to potholes, constant ad hoc repairs, and uneven, poorly done patches.
Internet victories seem to always arise from companies that do one small thing well, an unencumbered product that's new or better than the other guy in a very crucial way. Unless you stay better (Google) or manage to build a suite of stuff that people get accustomed to or dependent upon (Yahoo!) you will fall by the way (Hotbot, Altavista, all the other poor schmoes I'm forgetting).
In the online space, Microsoft has been unable to foist stuff on people, try as they might, and they're too un-nimble to build a toehold technology/site that people fall in love with and then build on that. Everything they do starts out encumbered. In that same space Yahoo survives because early on they built their initial success at ordering the web (before searches did it better) into a mail and portal product people came to rely on. It looks like now Yahoo is merely in a position of holding on to mail and portal clients as long as they can before Google chips them away.
I use Yahoo for: (1) the Yahoo mail plus service with disposable email addresses; this I live by, but use it only for online accounts and stuff I don't want coming to my Gmail account; (2) weather; they rely on Weather.com, and present a three-day forecast that I like better than Google's weather. I don't think people are discovering or switching their homepages to Yahoo.
Gluing Yahoo onto Microsoft doesn't seem to to add anything to either company. How is MS going to build business based on Yahoo's slipping market share? How is a desktop monopoly going to help Yahoo gain share when that desktop monopoly has never succeeded at that? Microsoft typically crowds and clutters web pages with ads and MS branding. Yahoo already has busy-ness and clutter down pat. Both Yahoo and Microsoft could be good if they were to think creatively about how to be good: focus on online services that are better than what Google's strategies will allow (NOT search), or, in MS's case, hone instead inflate their OS (vid. Vista) and Office applications. But Microsoft has demonstrated again and again that they are constitutionally incapable of doing these things with their own or anyone else's technologies.