“There’s room for three to five players in this space. We don’t have to beat each other to prosper.”

– Palm CEO Jon Rubinstein

Palm CEO Jon Rubinstein likes to say smart-phone makers “don’t have to beat each other to prosper,” but it’s beginning to look like they–or, rather, Palm–might have to. Because while the Pre may have put Palm (PALM) back in the game, it’s not clear how long it can keep it there. With competition in the emerging smart-phone market ratcheting up as we head into the holidays, some analysts are predicting that Palm’s quarterly sales may decline–sharply.

“[Palm’s] guidance of a sequential decline in revenues in the second quarter implies that Pre sales are not off to the races,” Needham & Co. analyst Charlie Wolf wrote in a research note today. “Although Palm did not say what Pre sales were in the quarter, they appear to have been around 600,000 units, about 100,000 above our estimate. Palm indicated that revenues could fall to $240 million to $270 million in the second quarter, a number that implies that Pre sales could fall to 500,000 units vs. our previous estimate of 750,000 units.”

Interesting that Wolf pegs Pre sales as being above his estimate, since Palm hasn’t yet broken that number out. Indeed, in a conference call with analysts yesterday the company was so quick to dodge questions about Pre sales that I assumed it’s not an impressive number. But if the company really did ship 600,000 units as Wolf contends, that would suggest it’s doing pretty well at market, though certainly not as well as the Apple (AAPL) iPhone or Research in Motion’s (RIMM) BlackBerry. Odd then, that Palm wouldn’t disclose a hard sales number.

“The Pre and its siblings running on Palm’s WebOS software platform appear to be a serious contender in the smartphone market,” Wolf concludes. “But it would be premature at this point to declare it a winner in view of the fact that the smartphone market will shortly be overrun with new phones from Motorola and others running on the Android platform as well as new BlackBerry models in time for the holiday selling season.”

Sure, there might be room for three to five players in the smart-phone space, as Rubinstein claims. But that space is currently occupied at least seven players–Apple, RIM, Nokia (NOK), Motorola (MOT), Samsung, Sony Ericsson and Palm. Which means somebody’s got to go. So while Palm might not have to beat anyone to prosper, it may have to, to survive.

“The sole driver of the increase in Apple’s price target is a higher valuation of the iPhone,” Wolf wrote. “Courtesy of network effects, the explosive growth of the iTunes App Store…should translate into a higher growth trajectory of iPhone sales going forward….By exploiting a commanding lead in the all-important smartphone applications market, the iPhone is in a position to chalk up share gains in this fast-growing market that could surprise everyone….In many respects, Apple and Amazon are in similar positions. Amazon holds a relatively small but growing share of the e-commerce market, which itself is small, but growing an order of magnitude faster than the physical retail market.”

Wolf admits that his latest forecast is “judgmental” in that it’s based on the premise that software, namely iPhone applications, will drive hardware, namely iPhone sales. But he explains that the premise does have a proven track record in markets characterized by increasing returns and network effects.

“We have upped the number of iPhones that will be sold in 2018, the final year in our model, from 67 million to 107 million,” Wolf added. “Our forecast has the phone capturing 20 percent share of the smartphone market in that year, up from 12.5 percent recently. We should note that the iPhone’s share of the worldwide market is already around 12.5 percent. So our forecast is by no means an aggressive one.”

No doubt about it, it’s a good time to be an Apple investor.

Seems the Street would have much preferred the “boatloads of money” Yahoo CEO Carol Bartz once said she’d demand for a search deal, than the “boatloads of value” she claims to have given them this morning. As I write this, Yahoo (YHOO) shares are trading down more than 12 percent at $15.14. Microsoft (MSFT) shares are up 1.41 percent at $23.80.

Below, a roundup of analyst notes that have been issued on the deal.

Jeff Lindsay, Bernstein Research: We believe Yahoo!’s search deal represents a significant positive for the company’s economics, as both Yahoo! and MSFT were too subscale to compete effectively versus Google. Although the combined 30% search share is still less than half the size of Google, both Yahoo! and MSFT will realize significant cost savings from combining their search technologies. In addition, the greater scale should increase the effectiveness of the search engine, driving revenue synergies through improved search monetization.

Sarah Friar, Goldman Sachs: We view the deal as positive for Microsoft as terms are better for the company than had been speculated (no upfront fee; 88% TAC) and the combined market share provides scale to drive efficiency and legitimacy/relevancy for Microsoft’s online investments. Yahoo!’s $3.0 bn/year search sales translates to $360 mn/year for Microsoft in revenues. Microsoft will incur incremental expenses when the deal closes (expected early CY10), but limited (if any) impact on FY10E and while investments will continue into FY11, our model already assumes sizable expenses.

Douglas Anmuth, Barclays: YHOO-MSFT terms not nearly as favorable as anticipated, but we believe deal is neutral to the co’s L-T positioning. We would have liked to have seen an upfront payment, higher TAC, & rev share on Bing.com searches among other things, but we like that YHOO maintains ability to sell search adv, & therefore relationship with its largest advertisers. It’s unclear how favorable the deal will be to YHOO over time, but our fundamental reasons for owning shares remain the same. We expect better execution on the audience & content biz & specifically within display adv., & we believe YHOO will be able to take out a meaningful amount of costs from the biz aside from search tech. over the next couple yrs.

Peter Misek, Cannacord Adams: We are relieved that Microsoft did not have to provide an upfront payment as part of this deal while effectively garnering more scale. This deal provides Microsoft with a much needed boost in competing with Google (GOOG : NASDAQ : US$435.00 | BUY) as its search algorithm, Bing, is being catapulted to greater market share. In addition, utilizing Yahoo!’s sales force for premium search will allow Microsoft to lower expenses over the duration of the partnership while attempting to attract a greater level of advertisers for the combined platforms. We believe this is a much needed relief for Microsoft, but is one step in a greater battle. In the end this doesn not solve Microsoft’s competitive disadvantage with Google. Rather we think it accelerates Microsoft’s desire to think outside the box and come up with a non-linear way to catch Google.

Heath Terry and Andrew Thomas, FBR Capital Markets: The lack of an up-front payment, no minimum revenue guarantee, and a revenue share that, while above average, is slightly below the +90% that larger deals command make for a lackluster deal for Yahoo!, in our opinion. The lack of any display component to the deal also seems like a missed opportunity for the company. As we see it, the only financial benefit to Yahoo! is the ability to shed the not insignificant technology costs associated with running a search engine. According to the company, this should result in an annual benefit to GAAP operating income of $500M….Restructuring these two businesses and untangling them from their existing partnerships and internal ties will be a massive organizational challenge for both companies.

Mark Mahaney, Citi Investment Research: Implications For YHOO – Positives: 1) YHOO believes deal would generate incremental $250MM in annual cash flow (17% accretive to our ’09 est)–assumptions very hard to test, but magnitude is reasonably conservative; 2) 88% TAC is higher than industry average, but as expected given deal size. Challenges: 1) No upfront payment to YHOO is a negative vs. expectations, tho guaranteed RPS provides significant backstop; 2) Lack of display advertising deal is a negative vs. expectations; & 3) Acknowledgment of YHOO’s Search technology limitations.

Todd Greenwald, Signal Hill Capital Group: The deal announced today will take a very long time to come to fruition we think, and will face several challenges–it will face regulatory hurdles given Microsoft’s antitrust history (though we’d expect it to ultimately get through given Google’s dominance). Additionally, it seems hard to fathom operationally, as it will require Yahoo’s salespeople to be selling Microsoft’s technology. Advertisers will want one point of contact (which would be Yahoo), though that point of contact won’t be entirely responsible for what they are selling–instead of bringing in an engineer from within the same building, the Yahoo salesperson may have to coordinate with a Microsoft employee up in Redmond. Not impossible, just tricky. And considering how smooth and automated the process of buying ads is on Google’s platform, this could prove to be a competitive disadvantage.

Mark May, Needham & Company: Search advertising is not a zero sum game, in our opinion. If Microsoft is able to make Yahoo! (and Microsoft) search more effective through this deal/combination, then we believe is will result in advertising spending more on the new search platform but not less on the Google platform. A more effect Yahoo!/Microsoft search platform does not mean Google search becomes less effective, and we believe there is more demand than supply for effective search marketing. The dollars will likely come from other, less effective, buckets.

Business 101 convincingly argues that most large M&A deals and partnerships are not successful. And, most large-scale Internet media M&A deals and partnerships have tended to under-perform their original promise (e.g., AOL Time Warner, Google/MySpace, etc.). Moreover, in the case of Yahoo!/Microsoft Search, you have two very different cultures and an expected 24 month transition process. The odds are stacked against this deal having a meaningfully impact on Google. And, over the next 2+ years while Yahoo! and Microsoft are trying to transition, Google will be innovating.

Apparently, investors aren’t too keen on the deal. Why? A number of reasons, according to Needham & Company analyst Mark May. “While the details of the deal can confuse the risks and benefits to Yahoo!, this deal ultimately means that Yahoo! is outsourcing search to Microsoft,” May told Digital Daily. “If you you’re bullish on search, and on the power of having combined strength in both search and display, I think you’d have to view this deal as negative for Yahoo! and positive for Microsoft.” May noted that there are a number of reasons for Yahoo investors to look askance at this deal. Among them:

• There’s no upfront payment.
• The deal requires regulatory approval and isn’t expected to close until 2010.
• The companies don’t expect to see the full benefits of the deal until 24 months after regulatory approval.
• While the companies claim Yahoo “will become the exclusive worldwide relationship sales force for both companies’ premium search advertisers,” most of the value is and will be derived via the self-service channel–which Microsoft will now control.
• The deal could put Yahoo!’s affiliate/syndicated search business at risk.
• The deal’s 10-year length may put Yahoo at Microsoft’s mercy given that there’s only one other supplier–Google (GOOG).

Complete Coverage

• WWGD: What Will Google Do, Now That There Is Finally a MicroHoo?
• Liveblogging the Yahoo-Microsoft Search Deal Conference Call: The Carol and Steve Show Debuts!
• Yahoo Investors on Microsoft Deal: Do Not Want
• Yahoo CEO Carol Bartz’s Letter About the YaSoft Deal
• MicroHoo Deal Finally Official in a 10-Year Landmark Partnership (Plus the Full Press Release)
• Yahoo To Get 110 Percent of Search Revenue in First Two Years of Deal With Microsoft
• Before Yahoo-Microsoft Deal Terms Are Unveiled, Let’s Go to the Videotape From the Last One
• Microsoft-Yahoo Deal Struck–Will Be Announced Within Next 24 Hours

Shares in the company slid still deeper into the mud today as the market reflected on the uneventful conclusion of the company’s merger talks with Microsoft (MSFT) and its decision to–well, let’s face it–become a reseller of Google (GOOG) ads. In early trading, Yahoo’s stock, which plummeted 10% in late trading yesterday, fell another 6% to around $22. And it’s likely to fall further still, with financial analysts taking swings at it like kids at a piñata.

“This deal diminishes Yahoo’s relevance among advertisers and strengthens the hand of a key competitor,” analyst Mark May of Needham & Company told clients in a research note today.

And over at Cantor Fitzgerald, analyst Derek Brown agreed. “We remain concerned about the long-term implications of this deal for Yahoo,” he said. “While the company should reap a near-term financial windfall with Google by its side, it seems to be sacrificing its vision of becoming a ‘must buy’ for online advertisers. After all, doesn’t this deal make Google, not Yahoo!, the ‘must buy’ for online advertisers?”

Jeffrey Lindsay of Bernstein Research says the deal is a litigation nightmare waiting to happen. “We think at a minimum that the current deal will result in further lawsuits, which Yahoo will ultimately have to settle, further impacting the economics of the deal,” he said.

And analyst Laura Martin of Soleil Securities Group says it’s just a nightmare, plain and simple. “Execution issues become more challenging as talent continues to stream out the door,” Martin said in a research note. “With the collapse of the Microsoft deal, Yahoo employees lost (in addition to shareholders), and we expect Yahoo’s employee turnover to accelerate as its share price falls and their stock options are way underwater. Shareholder litigation may distract the board and senior management and will cost Yahoo shareholders more money.”

And Shar VanBoskirk, an analyst with Forrester Research (FORR), well, she reacted as I imagine many observers did–with a slow shake of the head. “It’s a great deal for Google,” she told BusinessWeek . “I have no idea what Yahoo’s thinking.”

If it was thinking at all … Said Mark May, an analyst at Needham & Co., “This just reaffirms the view that Yahoo, and particularly Jerry Yang and David Filo, blew it. It’s hard to see how this management team is going to be able to extract or create value anywhere near 33 bucks a share anytime soon.”