Actually IMHO, this is pretty good. How could Yahoo compete against newcomers who leveraged Facebook's social graph while Yahoo didn't. Facebook Connect does definitely ramp up the traffic and drives viral growth. Without it, Yahoo could lose its strong position in some key areas. This ensures Yahoo won't be a loser - in terms of traffic and it will even accelerate its audience growth; which means more revenues. On the flip side, yes, identity layer is strategically important in the long term and Yahoo shouldn't just give up. Yet they don't have to. They can still extract identity information from their users, and create an independent identity layer, by pushing micro social networks across their object centered social sites.