If Google Gags, Won't Microsoft-Yahoo?

The answer is complicated, in part because there remains uncertainty about the decline's cause. If the problem is contained to Google, Microsoft could greatly benefit depending on execution. But if U.S. economic uncertainty is the cause, Microsoft could be buying Yahoo at both a good and bad time.

Simply stated, Google's paid ad click rate declined 0.3 percent year over year in January, down from 25 percent growth in the fourth quarter. Sequentially, Google's paid click rate fell 12 percent between the October quarter and January. I obtained the data from separate Bear Stearns and Citigroup reports.

ComScore didn't publicly release the data, which was available, today, in a monthly "custom" report available to clients. But a ComScore spokesperson confirmed the veracity of the data contained in both reports.

While Google's paid ad click rates ruffled Wall Street, Yahoo paid clicks were up 15 percent year over year but down 3 percent sequentially. Microsoft paid clicks declined 9 percent year over year but were flat sequentially.

The big question on the minds of some online advertising watchers: Is the market softening as the U.S. economy edges into recession? Sources familiar with the ComScore report said that the paid click declines are consistent with falling e-commerce data, indicating that there is a larger macroeconomic trend working as catalyst.

"While this is one data point for domestic google.com only and from one source, which may or may not be accurate, it is a concerning data point and somewhat reflects what we have heard from SEMs [search engine marketers]—that they were not seeing a high volume of clicks from consumers possibly due to the economic slowdown," wrote Bear Stearns analyst Robert Peck.

Google's declines were greater than Microsoft's, while Yahoo showed solid year-over-year growth. That's not a consistent pattern for saying there absolutely is a greater macroeconomic influence at work. I'll lay out what the numbers could mean for a Microsoft acquisition of Yahoo, given possible contexts for Google's problems.

Caveat: I'm assuming that the numbers aren't an aberration, which they could well be. As Citigroup analyst Mark Mahaney observed, the declines could be because of "Google's ongoing efforts to improve both lead quality for advertisers and the user experience for searches."

What the ComScore numbers could mean for Microsoft-Yahoo:

• Google's in trouble, assuming the paid click softness isn't widespread. A problem affecting Google's core business would be good timing, giving Microsoft more time to integrate Yahoo into its operations.
• Yahoo's advertising value increases, again assuming Google's problems or Yahoo's growth are isolated circumstances. Yahoo's paid click growth is just what Microsoft needs to offset its own troubles and to gain some footing against Google.
• Yahoo is a bad buy, if there is a macroeconomic trend; bad timing. Analysts had expected online advertising to steer clear of, even benefit from, spending slow downs elsewhere. But an online advertising decline would hit Microsoft just as it is buying Yahoo to increase its online advertising presence. Timing would diminish the acquisition's already marginal benefits where they were supposedly strongest.
• Google is weakened, if investors perceive problems, whether or not real, and dramatically drive down the share price. Google stock in free fall would put more pressure to perform, increasing outside scrutiny, possibly tarnishing the corporate brand and putting pressure on operational decisions at a critical juncture. Even perceived Google problems would take pressure off the Microsoft-Yahoo acquisition and provide the new company more time to put together all its advertising and search infrastructure and services.

This quarter will prove decisive for Google. Either there's a problem, or there isn't. Microsoft faces its own challenges, starting with Yahoo and whether or not there will be an acquisition; if so how soon?

If nothing else, today's ComScore report is great marketing FUD for Microsoft and evangelism of a Yahoo acquisition. Today, there was plenty of fear, uncertainty and doubt on Wall Street about Google—and Microsoft needed to do nothing to get it.

What a lucky break.