Microhoo Could Heat Up the Online Ad Battleground

By Clint Boulton  |  Posted 2008-02-02

Microhoo Could Heat Up the Online Ad Battleground

If Yahoo accepts Microsoft's $44.6 billion purchase offer, the combined entity could help slow Google's march in the Internet market, but Microsoft will have to rationalize several disparate software products while competing with Google in search, online ads and software-as-a-service applications.

IDC analyst Karsten Weide said a merger of Yahoo and Microsoft would create a stronger competitor to Google and provide advertisers and consumers with better products.

Consider that Google's gross U.S. Internet advertising market share was 32.5 percent in the third quarter 2007, compared with Yahoo's 16.5 percent and Microsoft's 6.2 percent share, Weide wrote in a research note Feb. 1. A combination of Microsoft and Yahoo would give Microsoft a 22.7 percent share.

This is still less than Google, but it would give Microsoft more firepower and would give it a better fighting chance against the market leader, particularly where display ads are concerned.

Google calls Microsoft's bid for Yahoo troubling. Read more here.

Yahoo was the top display ad publisher property with 18.8 percent of display ad views in November, the most recent available numbers from comScore, while Microsoft had 6.7 percent. Together, Microsoft and Yahoo could have 25 percent of the display ad market, compared with Google's paltry 1 percent share.

Having strong display advertising is a plus, but Google still has at least 60 percent of the search market, and advertising follows search. Thus, Microsoft's best opportunity to topple Google in online advertising may be to leverage Yahoo's strong mobile ad position.

Mobile Ad Push


According to Weide, Yahoo bests Google in mobile Internet usership, 29 percent to 24 percent. Add to that Microsoft's slight mobile audience, and IDC sees Microsoft as the top penetrator with a third of mobile usership.

The usership won't definitively translate to mobile ad sales, but should Microsoft successfully integrate and nurture Yahoo's mobile ad assets, the software maker will have a real weapon with which to attack Google.

That said, Google isn't standing still. Its Android mobile operating system software might be a bit slow out of the gate, but rumors persist that Google is working hard (allegedly, with Dell) to bring a mobile phone to market.

The deal makes the mobile ad market all the more important. Whoever wins could dominate in advertising because consumers will ultimately access their various social networks from their iPhones and Google phones.

For  five reasons Yahoo should/shouldn't take Microsoft up on its offer, click here.

Ironically, Microsoft's bid, an astounding 62 percent premium over Yahoo's market value, came a day after Google reported fourth-quarter profit of 17 percent, considerably lower than the 46 percent profit boost in the third quarter.

Payouts to underperforming social networking sites weighed on Google's numbers. But revenue still rose 51 percent from a year earlier, showing that the company is still enjoying billions of ad clicks.

Once Google's partners figure out how to monetize their platforms properly, activities around MySpace and other social sites could boost Google's ad revenue. Microsoft will have to be able to comfortably shoehorn itself into this market.

Net-net, the deal is about Microsoft buying communities of users, millions of whom use Yahoo Mail, and other Internet-based software services, such as Flickr and del.icio.us.

Product Merger Mania


But even if Microsoft successfully bundles those communities with Windows Live Spaces, it may not matter. Forrester Research analyst Charlene Li pointed out in her blog Feb 1. that "both players are woefully lacking in this area."

And if those communities and technologies are successfully tucked into Microsoft, do all of the Yahoo mail users become Hotmail users? Does Yahoo's search engine get subsumed by Windows Live Search? Both search engines just got retooled to better compete with Google.

Will the Yahoo portal be deemed "Yahoo powered by Microsoft," or simply "Microsoft"? Also, what happens to the Zimbra assets? These products overlap with SharePoint and Office.

Microsoft's bid for Yahoo faces challenges. Read why. 

In summary, what stays and what goes? This question carries with it vast uncertainties.

Technology Business Research analyst Allan Krans said in a research note that Microsoft and Yahoo will face a "hard uphill battle in the Internet search market whether they merge or not, but a unified front may be the best option to challenge Google's dominance in the space."

If Microsoft figures out the answers to these questions and executes accordingly, it will become a formidable force to fight Google in the search, online ad and cloud computing markets.



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