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You are assuming their search has to be very good. Would it make a difference if the search was merely good enough. Search engines will generally get the most popular stuff well enough (eg "Justin Bieber") and it is the longer tail where they distinguish themselves. But does Yahoo need to distinguish themselves there?

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Google became popular because of their excellent performance on the long tail. Yes ~30% of all queries are for the same 50 search terms, but 50% are unique or nearly unique queries.

Yes, they surely do. Bill Gates pursued a "good enough" search strategy 10 years ago that cost msft the business.

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