This story shouldn't be too surprising - Google might sell Yahoo on avoiding the Microsoft culture. Google functions on a different level - I don't think they're caught up in MBA style deal-making yet. They seem to think out of the box - this reminds me of The Google Story - where the google owners turn around the plane to save the AOL Europe deal. Also, Google likely isn't "worried" like some commenters on other blogs might say - it's just posturing.
Why is Yahoo so important? What innovation do they really have? $44B for what exactly? I don't understand the Yahoo/MS idea - does the marriage of two search losers make a potential winner? Buy a small company with some disruptive innovation instead! Re-evaluate your me-too approach! According to this article, even putting Yahoo and MS together still only nets 16% of the market. Maybe for E-Mail and instant messaging - but why clean the vault for that?
Microsoft seems to stuggle here - they can't leverage their dominance on the desktop to gain market share in the huge online advertising space. So they spin in circles.
Give a small elite team 1/1000th ("carry the 7...") of that $44B, and you will likely get some real innovation!!
UPDATE: Some "inside sources" tell me that all this sponsored search talk is a red herring. In fact, Microsoft is interested in Yahoo for their Media capabilities (infrastructure, current deals, etc).....and want to stream it all to the xbox 360 and take over the living room... A possibility is that sponsored search is "Web Ad Revenue 1.0", but more advanced ad rev is possible direct to the living room.. This link seems to back that up.