Monday, February 4, 2008

Microsoft buys Yahoo! (maybe) by Even Aas-Eng

Its pretty clear what’s the talk on the town at the moment, here is my take on it.

This is a big but expected move. I will try and touch on the different relevant areas.

Search: Google is number one in search in most markets except where local competition has triumphed (China,Russia) Microsoft has failed spectacularly, there is very little traffic and adcenter don’t have to many clients either. As everyone knows Yahoo! is the number two player in search. The problem is that Google is so dominant that even a Yahoo!/Microsoft merger won’t be adequate to challenge Google. In the US market where Yahoo! is very strong the market share including Microsoft will only reach 33 % (comscore figures) In many large European markets the two companies will only have single digit market shares even after a merger, in a market like Spain for instance Google has a market share of 90%+
But all this doesn’t mean that Microsoft or Yahoo! can/should give up search. Search is growing and SEM is growing and we don’t know how long Google’s crusade around the world will last. But it will last for a very long time if no one tries to compete with them.

Clients: Google didn’t not invent SEM, Bill Gross did! He started Overture and sold it to Yahoo! years before Google copied the model and invented Adwords. My point is that Yahoo! much like Google has clients and partners all over the world that has been spending ad dollars for years. These client relationships are worth a lot. Yahoo! like Google has dipped in to the long tail of advertisers, Microsoft has focused more on the agency world and large clients. If the merger becomes reality Microsoft will suddenly have a much larger client list, they will instantly make more money on adcenter and Yahoo! search will get new larger clients that already cooperates with Microsoft on their advertising products. So even if “Microhoo” doesn’t instantly capture new market shares they will instantly make more money.

Display advertising: This is where it really gets interesting. Google has Adsense and Google bought Doubleclick. Microsoft bought Aquantive but they don’t have a large enough inventory. Well they do now if this merger happens. As advertising dollars goes digital the display ad segment will grow immensely in the years to come. Technology will enable advertiser to reach their target groups across the WWW, but you need to own that technology and you need an ad network. Yahoo! has developed a competitor to adsense but it has had limited success but Yahoo! has portals and various content verticals (Sports,finance, etc) plus the fact that they are one of the largest email providers on planet earth. In other words, they have a lot of inventory to sell. Combine this with Microsofts MSN portals, IM, xbox and Hotmail you have one big online advertising platform with global reach and local presence. This platform obviously needs to be complex and fitted to all sorts of clients, well if you are Microsoft and you just bought Yahoo!, Aquantive and FAST you should have the opportunity to create something spectacular.

What happens now: I think that this “war” is mostly about two things, technology and eyeballs, with an emphasis on eyeballs. Both Google and Microsoft have the technology which means that this race now is all about the eyeballs. I therefore assume that we will see more companies swallowed by the two giants in the years to come. Who is next? My guess is vertical ad networks and affiliate networks. The rest of the world’s media companies thought they had their hands full with Google, now it looks like they have two giants to fight with. It will be interesting to see if they will be more willing to join resources with Microsoft than they have with Google. “Google-phobia” has infected many of them, will they get “Micro-phobia” as well?

Steve Ballmer declared last year that he was an advertising man; I think he just placed his money where his mouth is!