Since Carol Bartz took over last year as the head of Yahoo, Microsoft has kept its distance. According to a New York Times source, the talks have started up again. At this point they are very preliminary, but what is being discussed again is advertising.
The common enemy is obviously Google and their mature advertising/Adsense platform.
What isn't immediately clear to me is what the two giants think they can do better together that they haven't been able to accomplish separately. The conventional thinking is that a partnership under which Microsoft would sell search ads for Yahoo, and Yahoo, in turn, would sell display ads on Microsoft properties would benefit both companies. Which in turn would allow them to compete with mighty Google.
The problem is the whole advertising publishing ecosystem. Google has had it up and running now for years and Yahoo and Microsoft are trying to build/acquire it in pieces. They should stick to their in-house guns in my very humble opinion. Neither Microsoft nor Yahoo are being properly monetized right now and even if so, the above situation doesn't really address the 'Google issue'.
Google is selling ads on other people's sites. By the boatload. Sure Google makes a ton of money on the ads that it puts on its search results. But first you need someone to search Yahoo or Microsoft Live to get placement for those kinds of ads. Right now, there are fewer and fewer people doing this. This is where Microsoft and Yahoo need to focus their attention. Getting people to use their properties.
As for selling ads on other sites? Google has a huge lead right now, probably insurmountable even by a well teamed Microsoft-Yahoo assault.
Any competition would be good for publishers/advertisers, however. With Google being the only game in town, they can squeeze larger and larger margins out of their customers and clients. They will also have to step up the advertising support, which is bare bones at the moment, if they want to impress their customers.
Not that they have to. An uncoordinated Microsoft/Yahoo two-headed monster won't make a dent in Google's market share.