Round About
The regal race to establish the eventual monarch has begun! The online ad and search business triumvirate: Google, Yahoo! and Microsoft have taken the tracks. As the online community holds the breath and the digital business waits on its path, Microsoft is likely to team up with Yahoo! in its bid to dethrone the incumbent champion Google.
The buzzing compulsions, the menacing pairing, the fight proper, the ensuing outcomes, the indomitable endurance and much more, are made bare before you as you move on to introduce your eyes to this article.
The search triumvirs
Microsoft and Yahoo! intend to close in on Google, the Internet’s biggest reservoir in the online ad and search business. As per the media buzz, they might combine their muscles in a merger. As it stands now, the estimated $50-billion deal between Microsoft and Yahoo! would up the combined companies’ share of the search advertising market to 27 per cent against Google’s 65 per cent. It would bridge the hiatus between the combined entity and Google in the online advertising to 13 per cent, according to one research estimate on the Internet.
Web traffic analysis firms, Alexa Internet and Netcraft, understand that Yahoo!’s US portal is the most visited portal on the Internet with more than 412 million unique users.
Why is Yahoo! Yahooed by Microsoft
Stung by the loss of Internet advertising firm DoubleClick to Google last month, Microsoft has intensified its pursuit of a deal with Yahoo!, asking the company to re-enter formal negotiations. While Microsoft and Yahoo! have held informal deal talks over the years, the latest approach signals urgency on the part of the Redmond giant that has been lacking until now. Part of the reason for that is because Google keeps trumping Microsoft on the deal front, beating out the company on not just DoubleClick, but also for a renewed search advertising pact with AOL in 2005 that Microsoft so lustily ran after. Moreover, with Google developing Internet-based software that directly competes with Microsoft Office, Microsoft has no choice but to go on the offensive.
The news of Microsoft’s latest approach comes as Yahoo!’s new search advertising platform Project Panama is just getting off the ground. The long-awaited platform posted disappointing first-quarter results, but sources said that was more a function of difficult comparisons to the year-earlier period and less a sign that the system was not working. That said, another quarter or two of similar results and investors might begin renewing calls for a sale or for CEO Terry Semel to step down. More importantly, a deal would create what one source described as “the dominant force on the Internet” in terms of eyeballs. That is an important consideration as more and more content flows online – as the equation goes, eyeballs equal advertising.
Microsoft along with Yahoo! also features complimentary offerings on the content side, with MSN drawing an older audience with its news focus. By contrast, Yahoo! attracts a younger demography with its entertainment coverage. Aside from cost savings, a deal would also create opportunities to use Yahoo! content on the Microsoft devices, such as making music exclusively provided to Yahoo! The music available on the Microsoft’s Xbox game console and Zune music player in the same way can be used by the customers.
As the cyber-fight rents the Indian air
Talking of the Indian chapter of the grand fight, lots of ifs and buts strike one’s mind. In India, Yahoo!’s Internet presence enjoys a higher market share than that of MSN. Yahoo! India Managing Director George Zacharias has claimed recently that Yahoo touches about 80–85 per cent of the online community in India in terms of e-mails, searches or its portal proper. Although MSN does not enjoy such a market share, Microsoft’s focus in India was not purely on the Internet as in the case of other competition. It had focussed on software and enterprise businesses. Its portal business took the centre stage about a year ago.
MSN India has put intense focus basically on three areas: online entertainment, mobile content and localization of portals within India. It made forays into an exciting area of Indian vernacular languages. It introduced its portal in five different Indian languages. It also introduced Windows Live, a set of more personalized services for Internet users. MSN claims to have a user base of approximately 500 million with nearly 250 e-mail users and 150–200 million instant messenger users. Yahoo! has been extremely aggressive in India than Microsoft in the Internet space. But Google has laid stress on growing its technological capabilities in India. Last year, being bullish on the Indian story Dan Rosensweig, Yahoo! COO, paid a visit to India to see for himself the goings-on.
Yahoo! also invested in an Indian online venture, Bharatmatrimony.com. It also announced IM in the Indian languages, even before the domestic Internet players.
Manned by 4,000 people, Microsoft has ensured the presence of all its six global divisions in India, i.e. MSN, a support centre in Bangalore and a development centre, Microsoft IT (which develops IT for Microsoft globally) and Microsoft Global Services in Hyderabad. The company has nine sales and marketing offices across the country. On the contrary, Yahoo! has over 1,000 employees in India which roughly constitute 20 per cent of its global engineering workforce. Yahoo!’s R&D Centre in Bangalore is the largest that the company has outside the US. The research centre, which is also a hub for Yahoo!’s emerging markets, develops products for Yahoo! India and the global markets. The importance that Yahoo! puts on India from Yahoo! Co-Founder David Filo’s words,’“India will play an important role in supporting growth in the emerging markets. We will continue to give more responsibility to our group here.”
As far as Microsoft acquisitions are concerned, in the last decade or so the Redmond giant has bought out over 75 companies. While in 2006 it acquired 11 companies, including Whale Communications and Lionhead Studios. Among the most crucial recent acquisitions for Microsoft was Groove, in 2005. But, at the same time, Microsoft has not always been successful with acquisitions. Microsoft’s talks to buy SAP hit rough weather after the database major Oracle announced to launch a hostile bid for PeopleSoft.
Why the deal would eventually be pushed through?
Microsoft was pushed to the brink, while Google showed everyone how to take a search engine from two kinds of having fun to a top 20 American company. What made it happen? If we just look at their revenue figures, then we will see that a massive percentage comes from the Adwords and Adsense products. Now, Microsoft is trying to get into the online advertising game, but can it compete without acquiring Yahoo! and their volume? Microsoft seems all poised to make a move at Yahoo!, and it is definitely going to happen in 2007.
Let us scan through some of the compelling reasons The search algorithm…
Microsoft’s horrid search algorithm is by far the single biggest problem that Microsoft has ever had. When there are no users using the search engine, then there are a ton of ads that are never shown. If Microsoft were to acquire Yahoo!’s search algorithm, this would be a prudent step in getting the users back.
Overture Yahoo! Search Marketing
Microsoft used to broker every thing through the company formally known as Overture for showing ads on msn.com search. Most advertisers like Microsoft’s Adcenter but there is n
ot enough volume from its search engine.
Yahoo! Publisher Network
YPN IMO is the best contextual advertising network available. They have a good quality control team and also a “real phone number that real people answer” if you have contextual questions. Few players provide the level of customer support in regard to contextual advertising that Yahoo! Publisher Network does.
del.icio.us –
While Google is signing up or buying all the 2.0 advertising space, Microsoft can acquire a huge name right here.
The People –
Microsoft realizes that they are not only losing ground in the search industry fast, but they also lost market share in the server technology to Zend (PHP) and other open-source products. If they want to keep their market share with Windows Server, I think bringing in some brilliant Yahoo! developers would keep them on the right track in making sure they integrate well with the open-source items.
Video –
Between Yahoo! Video and Microsoft’s Soapbox, the companies can combine for a decent share of the video market. The video market is important for video advertising. After two months of the beta test where Google did a trial run of video ads, it bought out Youtube.
Business Directory –
Microsoft gave up its Business Directory efforts. Yahoo! has always rocked it with its paid inclusion directory. It is by far the most respected business directory on the Internet. Even at $300 per year fee, webmasters line up all day to submit their websites. Google’s Business Directory, powered by DMOZ, is no match for it.
Aiming at pinning down Google Some observers feel that search technologies are the only money-minting fields for Google. The rest of the products – whether they are Google Earth, Google Docs. or even Gmail – have not been that successful.
Now, with the takeover of the DoubleClick, a major company that provides technology and data to advertising agencies and web publishers, and only second after Google, the search engine giant has in a way given a signal of solo dominance in the online market. Microsoft raised a great hue and cry about the acquisition, claiming it was a matter of antitrust and monopoly.
To counter Google, Microsoft Corp. recently announced the drive to acquire ScreenTonic SA, a Europe-based company in mobile advertising. This acquisition clearly reflects the company’s efforts on increasing revenues through mobile properties, an area that is still untouched by “innovative” advertisers. Yahoo! also launched several services to generate money from the mobile sector, but things are still in the oven. None of the two has been able to replicate the success Google achieved through its online revenue generation model.
Yahoo! also signed a definitive agreement to acquire Right Media Inc., a creator of the Right Media Exchange to further Yahoo!’s goal to create an open and accessible advertising marketplace.
Are there any roadblocks?
If separate Yahoo!, Live.com and MSN brands get merged into one brand, then to fully realize the value of the merger, there needs to be true audience consolidation under one brand. This will be tough to do, as there are huge overlaps in the audience, and it would be tough to give up on all of that extra traffic and page views.
In some markets – in Europe, in particular – the MSN brand trumps Yahoo!, and in others, Yahoo! is much stronger. In the United States, the brands are equally strong. So, why consolidate at all! Because maintaining separate destinations for essentially the same audience and purpose diverts valuable resources that could be used to create a unique, powerful experience that can compete and win.
This would be a merger, not an acquisition. This means that Microsoft and Yahoo! would each have to come to the table ready to forge a new company from the assets of the individual ones. Egos and innate disdain from being competitors over the past decade would have to be set aside. Geographic distances (Seattle to Sunnyvale) would have to be bridged. And, most importantly, a new company ethos, leadership and culture would have to be created.
Neither company has ever been through a merger, or even an acquisition of this size and scope. And, all of this would have to be done in the context of one of the most dynamic, innovative areas of business and in the shadow of a fierce competitor, Google. Even in the best of times, successful mergers are hard to pull off, and I’m not hopeful that executive time spent on company politics would be minimal.
Given the problems of a merger, the key metrics of success in three years is whether they would have made any progress in fending off or catching up to Google. After all, that is the main impetus behind the merger – that together, they would be better able to compete against Google. But given the distraction of the merger, and also, given that Google would not be so encumbered, it is unlikely that a combined Microsoft–Yahoo! entity would be able to do anything against the powerhouse.
In the very long term (beyond three years), there is a chance that a revitalized company would be in a better position to compete, but this assumes that Google stands still for them to catch up. Given the messiness of a full-out merger – and also the limited benefit it would bring to Yahoo! – a merger may not be in the pipeline anytime soon. More logical would be partnership agreements, whereby the strengths of each company are shared. These tentative first steps to a merger would make a lot more sense, giving both companies the ability to test the waters before jumping into the deep end.
Conclusion…
If Microsoft hopes to compete in this new Internet economy (contextual ads), they need a bigger chunk of the search market. Yahoo! is the only option IMO. While all of this would make sense and integration between the two probably would not be too difficult, the underlying risk over the first years would be the health of the online ad market. With the ad industry in general being cyclical, it could make a huge impact if it were to slow down at the wrong time. Nonetheless, the online ad industry should grow for years, even if the overall industry slows down. So, while there is some risk, it is probably minimal. If the proposed deal sees the light of the day, then whether or not the digital pairing will succeed in arresting the Google bandwagon, only time will tell.
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