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Microsoft and Yahoo, Together Again

Microsoft and Yahoo, Together Again

Microsoft may finally have swept Yahoo off its feet. If rumors circulating in the tech press are true, a search deal between the odd couple is close to being inked. With Yahoo still far behind Google and Bing a mere blip on the search market share horizon, the time could finally be ripe for the two to join forces.

By Erika Morphy
07/17/09 12:14 PM PT

Microsoft and Yahoo may be close to finalizing details on the elusive search and online advertising deal that the two have been flirting with for more than a year. The news that the duo are finalizing terms was reported by Kara Swisher in the All Things Digital blog.

Microsoft executives have flown from their Redmond headquarters to Silicon Valley to finalize details relating to the deployment of the technology, according to the post.

Neither Microsoft nor Yahoo responded to the E-Commerce Times' requests for comment by press time.

There are some sticking points that still could throw this arrangement into turmoil -- yet again -- according the blog post. They include the rate for traffic-acquisition costs and Yahoo's control over data. There is also the sheer complexity associated with such a deal.

No Hard Feelings

The market will have difficulty believing a linkup between Microsoft and Yahoo is in the works until it is actually finalized. If ever there were star-crossed business partners, they would have to be Microsoft and Yahoo.

Despite the long, convoluted and -- until now -- unsuccessful history behind their courtship, there are solid reasons why the two companies may be more motivated to consummate a deal now.

For starters, the online display advertising business is far weaker today than it was in 2008. At the same time, Google remains the huge competitor for both companies to beat: The latest stats provided by comScore show Google with a 65 percent market share in June. Microsoft Sites grabbed 8.4 percent -- a 0.4 percentage point gain from May, thanks to the introduction of Redmond's new search engine, Bing. Yahoo, for its part, registered 19.6 percent, a 0.5 percentage point drop from its 20.1 percent share in May.

Still, a 0.4 percent jump is not much to crow about, N. Venkat Venkatraman, a business professor at Boston University, told the E-Commerce Times.

"It is clear from the early indications that Bing has barely moved the needle in the search space," he said. "Google is the leader, and Yahoo and Microsoft are distant number two and number three."

Given these circumstances, it make sense for Yahoo and Microsoft to combine in order to have a decent shot at providing a credible alternative for consumers. "It is clear that Microsoft and Yahoo, on their own, will find it very difficult to dislodge Google's grip," said Venkatraman.

That Microsoft appears to be gunning for a relationship with Yahoo as opposed to acquiring it, which it famously attempted to do in 2008, also makes sense, Venkatraman added.

Microsoft would probably wind up overpaying for a full merger, he said.

Clients Benefits

Besides being of interest to regulators, which are never shy about weighing in on such matters, a combined Microsoft and Yahoo search initiative would be of great interest to the companies likely to use it, noted Joseph E. Knecht, managing director at Vipa Solutions.

"Looking at it from our clients' ad agencies, there are both pros and cons to the concept," he told the E-Commerce Times.

The bulk opportunities an alignment would provide for consolidated ad investments lend support on the pro side, he said. The obvious con would be the lessening of options available to advertisers in the marketplace resulting from a Yahoo/Microsoft tie-up. That consequence might also invite regulatory scrutiny.

One mitigating factor, in Knecht's view, is the fact that the search engines appeal to different demographics.

Assuming that the deal takes the form suggested by Kara Swisher's blog post, "I say, bring it on!" offered Miki Dzugan, president of Rapport Online.

"As a search advertiser who works directly with many ad platforms, including Google AdWords, Yahoo Search and MS AdCenter, I can tell you that the AdCenter platform is the biggest pain for the least reward of the three," she told the E-Commerce Times.

That said, Microsoft has worked diligently to try to improve, and the support personnel are as available and dedicated to helping the advertiser as Yahoo's support personnel are, noted Dzugan.

The loss of the Microsoft search base from Yahoo Search seemed to cut traffic almost in half for advertisers, with much less of that coming back through results from AdCenter, Dzugan also observed. "It seems as though the two together were more than the sum of the parts."

Another factor to consider is that consolidation might hamper innovation in search technology.

"Right now, innovation in search is just getting off the ground," argued Vipa Solutions' Knecht, "so it would probably be better to have multiple competitors in the market to keep it going."

Sooner or Later

The market will no doubt have the opportunity to examine these points more carefully. Even if this particular attempt to form a relationship fails, Microsoft and Yahoo no doubt will keep trying -- a probability supported by a quick look at their tortured history.

After Microsoft's offer of US$44.6 billion to acquire Yahoo was spurned -- more than once -- by Jerry Yang, Yahoo's CEO at the time, the two companies went their separate ways. Yang was roundly criticized for his actions -- most notably by activist investor Carl Icahn. Eventually Yang gave up his CEO post.

Yahoo and Google then signed a nonexclusive advertising agreement, but that deal drew so much attention from regulators around the world that if quickly fell apart.

All along, though, the rumors that a Microsoft, Yahoo deal was still possible -- strengthened by hints from both companies' officials -- never quite died down. Last October, for example, Microsoft CEO Steve Ballmer said at an industry event in Orlando, Fla., that a deal between Microsoft and the No. 2 Internet search engine would "still make economic sense" for both companies.

Indeed, the rumors gained significant traction earlier this year with reports that Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz were in talks -- again.


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