SEO Blog • Organic SEO Blog Search Marketing News

Advertising Provides Key To Microsoft-Yahoo Deal

So Microsoft is back, this time in talks over an unspecified "transaction" with Yahoo.

A couple of weeks ago, I said Yahoo may have blundered its way into a better outcome for its shareholders, and this latest twist strengthens my conviction. With a possible deal with Google still being considered and Microsoft back at the table, much-derided Yahoo is suddenly looking like Cinderella at the ball. Yahoo's management may yet emerge as heroes.

Microsoft maintains that it isn't discussing another takeover bid, though it reserves the right to do so. What might they be talking about?

Speculation has focused on combining Yahoo's and Microsoft's search businesses, which are a distant No. 2 and No. 3, respectively, to Google's. April figures from Nielsen Online, a research firm that tracks Internet usage, put Google's share of the U.S. search market at 62% versus 27% for a combined Yahoo-Microsoft. Surely the trend of ever-shrinking market share hasn't been lost on executives at Yahoo and Microsoft. So combining their search operations makes about as much sense as the Sears-Kmart merger.

The only advantage would be cost savings. Yahoo spends about $1.2 billion a year on "product development," much of that presumably on the search arms race with Google. It's hard to say how much Microsoft spends, but let's assume a comparable figure. Combining the two operations would presumably cut close to $1 billion in costs. I assume Microsoft would buy Yahoo's search operations, with some sort of revenue-sharing arrangement.

But why stop at search? A combined Yahoo-Microsoft still has the edge over Google in display advertising. Kevin Johnson, president of Microsoft's platform and services division, said in a widely circulated memo to employees this past weekend that his aim was to "disrupt" the market in search and "win" in display advertising. He noted that Microsoft's ad revenues had increased 40% compared with declines at Yahoo and Google. This intense competition doesn't yet reflect Google's deployment of recently acquired DoubleClick but suggests an intense campaign ahead.

Display is where Yahoo's sheer numbers are most compelling. What Yahoo has going for it is content and a vast number of unique visitors. Scale is what matters, just as it does for Super Bowl advertising. Scale is Yahoo's most valuable asset.

In the most recent quarter, about 87% of Yahoo's revenue came from advertising. If Microsoft essentially buys all of Yahoo's ad business, both search and display, then it gets nearly all the benefits of a merger. Yahoo would become a pure content company, basically outsourcing its ad business to Microsoft.

There's a deal that starts to make sense. This surely wouldn't be lost on Google, which has concluded a successful search advertising test run with Yahoo, and which would benefit from a display deal as well. In my previous column I called for Yahoo to turn over all its search advertising to Google, but that seems too limited now that Microsoft has upped the ante. Google should also be looking to acquire Yahoo's entire ad business in a cash-and-revenue-sharing deal.

The big question is price, but given the huge potential advantages to both Google and Microsoft, it should be a big number. As a Yahoo shareholder (I also own Google), I say let the bidding war begin.
By: James B. Stewart
Wall Street Journal; May 21, 2008