Earlier this year, investors rallied around Yahoo! (NASDAQ:YHOO) when the struggling search engine announced that it would outsource a chunk of its targeted paid-search advertising to Google (NASDAQ:GOOG).

If successful, the deal could have brought in as much as $800 million in additional revenue, as a result of Google's superior monetization skills. The partnership would also generate $250 million to $450 million in incremental operating cash flow, in part because Yahoo! could trim its operating overhead.

The Yahoo!-Google alliance has naturally encountered resistance. Publishers, advertisers, and rivals like Microsoft (NASDAQ:MSFT) all suggested that the deal would stifle competition in the industry. Apparently, the Yahoogle think tank now agrees.

The Wall Street Journal's online edition reports that the two companies have revised the terms of their deal, hoping to win over regulators -- but the new conditions are brutal. Instead of a 10-year pact, the partnership will now only be in place for two years, with an option for renewal. Worse yet, the companies are willing to cap the Google-generated revenue at just 25% of Yahoo!'s search revenue.

The new terms sting in so many ways:

  • Capping results dramatically lowers Yahoo!'s upside in the deal.
  • Making Yahoo! responsible for the vast majority of its paid-search needs -- and basing what it can generate from Google as a small fraction of its own efforts -- forces Yahoo! to aggressively staff its in-house marketing department.
  • Advertisers may be reluctant to stick with Yahoo! once they realize that even Yahoo! is turning to Google, yet the new terms mean Yahoo! still needs to keep an inventory of high-priced ads flowing.

These harsher conditions just aren't fair. Dot-com heavyweights like Time Warner's (NYSE:TWX) AOL and News Corp.'s (NYSE:NWS) MySpace are free to outsource their paid-search needs completely to Google. Yahoo! is not. By Yahoo!'s own admission, Google's platform would be good enough for $800 million in incremental top-line revenue, yet it's the only company presently forced to bear with its own inferior product.

If this is Microsoft's Machiavellian ploy to get Yahoo! running back into its arms at a rock-bottom price, the changes might make sense. However, Mr. Softy isn't tipping its hand, even after it's seen Yahoo! humble itself with a Google pact just to please its shareholders.

At some point, going through with this deal could be more detrimental than incremental for Yahoo!. We may have reached that point right now.

Other recent dot-com dealings:

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Longtime Fool contributor Rick Munarriz would rather throw a search party than call for one. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.