Will Microsoft Yell Yahoo?

Disclaimer first: Lots of companies talk to each other about lots of things. Negotiations could be about a merger, but as likely—or more—about closer cooperation. Discussion leaks could be a negotiating tactic, and possibly with unrelated objective, by either or both companies.

That said, a combined Microsoft-Yahoo would be a huge entity that would greatly change the online landscape. But the first impact wouldn't be on Google, but everyone else. Microsoft and Yahoo rank second and third in search, according to ComScore and Nielsen/NetRatings. The combined entity would leave a huge gap between the leaders and other search vendors.

The rivalry would likely lead to further search consolidation and less providers for consumers to choose from—assuming many of them would want something other than Google and Live/Yahoo, anyway. Additionally, a merger would shatter some existing alliances, as media companies pick and choose new search and advertising partners. The result could be massive consolidation around a few giants, so that the bulk of Internet advertising would pass through a smaller number of channels, akin to the television networks.

That said, Microsoft would jump from about 11 percent search share to close to 40 percent, which would be in striking distance of Google. Surely, Microsoft would want to go from No. 3 to No. 2 and a whole lot closer to top-ranked Google. Caveat: There is no guarantee a Microsoft-Yahoo could successfully aggregate search share. Brand confusion, increased consolidation and other factors could as easily shift share elsewhere, with Google being one benefactor.

Microsoft would assume other risks. The best merger is where there is little overlap. But Microsoft and Yahoo have tremendous content and services overlap. In many ways, Yahoo would be a better acquisition for Google than Microsoft, although overlap would be a problem for that merger, too.

Microsoft is a software company with advertising ambitions. Google is an information company that profits from contextual search and advertising. Yahoo is more of an online media and advertising company. While Yahoo falls somewhere between Google and Microsoft, its product portfolio overlap is much greater with Microsoft than with Google. Quick list: ad platforms; instant messaging; search; music stores; small business hosting and services; Webmail and Web portals; among many others.

The difference: Yahoo has assets, including its advertising platform and customer relationships, that could be highly beneficial to Microsoft. Combined advertising revenue of a Microsoft-Yahoo would be about the same as Google. However, a merger is no guarantee that ad revenues would remain the same. Customer overlap and Google pilfering could easily reduce combined ad revenues.

The bottom line for Microsoft is advertising. While the majority of ad spending goes offline, change is afoot. More dollars are flowing online and more of those dollars are moving into mixed media campaigns, such as Web, TV, print and mobile. In many respects, a Microsoft-Yahoo would be in a better logistical position to capture mixed campaign ad dollars, leveraging off Microsoft's technology and services combined with Yahoo's media and advertising assets.

Google is more of a one-trick pony that is trying to learn more tricks, as the company creates more applications and pushes into new media like TV and mobile. Google's revenue is almost all advertising and the company largely makes money on stuff it doesn't produce.

By contrast, a Microsoft-Yahoo would have lots more tangible assets, such as software, as a foundation for a greater advertising play. Additionally, Microsoft and Yahoo either both produce content or license it from others. Google's business is more about wrapping contextual search or advertising around other people's content.

Still, with a market cap approaching $40 billion, Yahoo would be a big-ticket purchase even for Microsoft. A rumored acquisition could bring out those pesky Google negotiators that snatched other deals from Microsoft. Google would be more likely to spend big for Yahoo than would Microsoft. But as I've also observed, Microsoft is on an advertising company spending spree. The company has bought back a whole lot of stock over the past couple quarters, which make a stock-cash deal more possible without necessarily deflating share value.

But those are all ifs. "What if?" is the question to ask. But "If not?" then "What?" Microsoft's options decrease as Google's presence increases.

Related Posts:

• The Google Quandary, Microsoft Watch, April 24, 2007
• RIM Around the Rosies, Pocket Full of Posies, Microsoft Watch, April 23, 2007
• Digital Media Bundling 2.0, Microsoft Watch, April 16, 2007
• DoubleClick and Microsoft's Thrift Culture, Microsoft Watch, April 16, 2007
• Microsoft Reorganizes Search, Microsoft Watch, March 21, 2007
• Tellme About Dial Tone 2.0, Microsoft Watch, March 15, 2007
• Who Shot Windows Live?, Microsoft Watch, March 8, 2007
• Wanted: Dead or Live, Microsoft Watch, March 2, 2007
• What Is Microsoft's Services Platform?, Microsoft Watch, March 1, 2007