This is a mish-mash of thoughts I've had lately. Pardon my lack of organization in this entry. Perhaps I will spruce it up a little later.
I'm going to go on the record and say that Google will merge with Yahoo within 5 years (by the end of 2009).
Focus of Microsoft: Microsoft has Google in its crosshairs. Microsoft will stop at nothing to destroy it. Consider Netscape and others. Microsoft is determined to be #1 in the search space.
Antitrust factors?: Microsoft also got off easy in the American antitrust trial. I have no doubt that Microsoft will feel at ease to use the same ruthless tactics (be they legal or not) against Google.
Search engine loyalty: I started using Webcrawler. Then I went to Altavista. I thought I would never use another search engine in my life. Enter Google. I haven't looked back since. If a better, faster search engine enters the market, I will switch in a heartbeat. I think that Microsoft, coupled with its enormous Research division, has the capabilities to create a Google-killer. Simply put, there is no lasting loyalty among search engine users.
Why does Google need Yahoo? Yahoo does everything well except for search. I consider Yahoo Mail, Games, Personals, Maps, Auctions, and a lot of other properties to be great successes (even if I don't personally use many of them). I don't consider Yahoo Search to be a success but Yahoo was never meant to be a search engine, only a directory.
Look at Google's initial foray into Desktop search. It's a disaster. Google Mail works decently, but it is still in beta. I don't feel that Google has the ability to bring solid products to market very quickly.
If Yahoo and Google combine, then Google can capitalize on Yahoo's many strengths. It's a perfect fit that the Redmond juggernaut will find difficult to overcome.