NEW YORK (AdAge.com) -- It's the biggest acquisition Microsoft has ever attempted and the biggest ever to hit the online ad business. But what's most surprising about the software giant's bid late last week for Yahoo is how little the $44.6 billion merger would change internet advertising -- at least in the near term.
The deal certainly helps Microsoft close the ever-widening share gap in the all-important but fast-growing search market; shore up its display business at a time when the big money advertisers are still hooked on scale; and create all sorts of back-end efficiencies in the form of engineering and infrastructure investment.
Perversely, given that it would unite the Nos. 2 and 3 players in the market, a merger would at least offer advertisers a sizeable search alternative to Google, and therefore is being portrayed by Microsoft as an increase in options for advertisers. "Today the market is increasingly dominated by one player," said Kevin Johnson, president-platforms and services at the Redmond, Wash.-based Microsoft. "By combining assets, we can offer a better choice [for consumers, advertisers and publishers]."
But consider: Microsoft and Yahoo consolidated would manage to net only half of Google's search share in the U.S. -- and internationally that number is even smaller. And their combination wouldn't actually cut into the monster search share Google already has.
The merger could also provide advertisers with a broader suite of online ad offerings and allow them to better integrate their search ads with display, video and even in-game units. In theory, at least, the combination of those formats allows marketers to influence consumers' opinions about a product or brand, create demand for that brand and fulfill or track that demand through a transaction such as a search. It also allows them to measure and attribute the value of the different types of ads consumers encounter on the path to a purchase -- for example whether John Doe has seen a display ad, and is then prompted to search for the product advertised.
Pain and gain
But individually both Yahoo and Microsoft have struggled to deliver on this promise. And with the inevitable and gargantuan challenges involved in merging two organizations of their size, it's hard to imagine them swiftly coming up with a solution that makes such cross-channel purchases easy for advertisers.
As Microsoft and Yahoo spend the next 18 months trudging through regulatory challenges and tussling over which search platform to use, Google will continue to steamroll its way into search domination and make strides in display, offline and particularly video media. In other words, Microsoft's short-term integration pain could be Google's gain. Perhaps one agency chief summed it up best: "If I were Google, I'd be happy about this."
"It's two non-integrated giants merging together, and I don't see how that equates to one cohesive offering," said Bryan Wiener, CEO of interactive agency 360i. His clients complain the marketplace is too fragmented, but they're not upset that there's a Microsoft, Yahoo and Google. It's the millions of smaller sites that are hard to aggregate. "Going from three to two is not addressing the fundamental challenge of the market."
Added Dema Zlotin, founder and VP-strategic services at Covario, a search-technology company: "Google will benefit from the uncertainty."
Tellingly, Microsoft emphasized Google's market dominance in the announcement of the Yahoo bid, surely as an attempt to proactively fend off antitrust concerns. "There is no chance they'll take market share in the U.S. through this combination," said Mike Vorhaus, senior VP-managing director of new media and strategy for Frank N. Magid Associates. "If this is about search, this is an expensive Band-Aid."
Yet, while Microsoft's public announcement focused on search, the real rationale for the deal is likely Microsoft's panic about its longer-term future as a web-based software company, rather than one that sells and distributes its productivity tools in boxes. This ground shift is something Google foresees as it markets its Google Apps suite of web-based productivity software to students and small-business owners (who conveniently happen to be ardent search customers).
It's important to remember, noted Rob Koplowitz, analyst at Forrester Research, that Office still pays the bills and anything that threatens Office threatens Microsoft. "The question isn't, 'Does Microsoft need to be afraid this year, but does Microsoft need to be afraid in 10 years?'" he said. "Increasingly, the lines between consumer applications and business applications are blurring and Yahoo has some interesting capability on the consumer side with mail, instant messaging and groups. Also, in terms of helping build out the next generation of applications, they bring lots of eyeballs."
The right time
Microsoft CEO Steve Ballmer said he called Yahoo CEO Jerry Yang the night of Jan. 31 to discuss the proposal, something Microsoft has considered for the last 18 months. The time to strike was right: U.S. regulators had just approved Google's acquisition of DoubleClick, emboldening Microsoft that its own massive deal could actually pass muster;
Yahoo's share price had slumped below $20 for the first time since 2003; and the 2008 outlook was disappointing.
But it's unlikely Mr. Yang welcomed the call. (First hint: Yahoo's statement addressing the bid was titled "Yahoo Board of Directors to Evaluate Unsolicited Proposal From Microsoft.") That may not matter; Microsoft "will get this deal done," said one person familiar with the situation -- even if it means bringing in other partners. (One to watch, according to this person, is GE's NBC unit, which already has several partnerships with Microsoft.)
Overall, marketers didn't seem too upset by the idea of merging the struggling Nos. 2 and 3 players in the internet ad market, although they all expressed uncertainty over exactly how it would affect the marketing space.
"Google was out innovating, not just in search but in the use of tech to provide highly targeted advertising," said Covario's Mr. Zlotin. "Given no change, we would expect continuing deterioration of market share from the other two companies."
One media chief likened the move to creating two giants to broker online ads to having two stock exchanges in the marketplace -- a New York Stock Exchange and a Nasdaq. He said he doubted it would fundamentally change advertiser buying power.
While in other media, collapsing two big competitors might be cause for worry; not so online, suggested Sarah Fay, CEO of Aegis Group's Carat and Isobar. "It's not like one of the TV networks going away. The digital market, the internet, is so fluid that there are lots of opportunities for advertisers to go in lots of different directions."
More substantially, a Microsoft-Yahoo combo would be a deadly display advertising company; its sites would reach 81.5% of the total worldwide home and work audience.
"I certainly think it's very early to tell, but you are now talking about a level of scale in terms of a massive pool of audience that we've never recognized before in the online space, and we think scale is a very good thing," said Alan Schanzer, managing partner of WPP's MEC Interaction. Amanda Richman, senior VP-director of digital services at Publicis' MediaVest, said the combination of audiences and applications, even if the portals remained separate identities, could be intriguing. "So what insights can be gleaned ... that advertisers can activate?"
And how to meld the brands? Mr. Ballmer didn't address it directly, but instead suggested that Windows Live, Office Live and Yahoo are all "powerful opportunities, powerful brands. Exactly how we relate MSN and those other things, we have some thoughts but a team from both companies would be in the best position to assess that."
But What Will Governments Say?
Possible Regulatory Obstacles to a Yahoo/Microsoft Deal
Congress: U.S. Sen. Herb Kohl, (D-Wis.), chairman of the Senate Judiciary Committee's antitrust panel, lost little time in announcing plans to hold hearings if Yahoo OKs the deal. "We will need to scrutinize the deal carefully to ensure that it will not cause any harm to the competitiveness of what has been a vibrant high-tech marketplace, nor negatively impact the privacy rights of internet users," he said. The committee held hearings on Google's purchase of DoubleClick but took no action.
U.S. Antitrust: The Federal Trade Commission scrutinized the Google/DoubleClick deal because the main concern was advertising dollars, but the Justice Department said it is "interested" in being the one to examine a Microsoft purchase of Yahoo. Overall the Justice Department has been more willing to approve deals without conditions than the FTC, but Microsoft's history of being sued by the department for antitrust violations could mean closer scrutiny. Approval will rest on whether the deal improves competition by creating a viable Google rival or lessens competition by making it harder for smaller rivals to compete. The FTC's approval of the DoubleClick deal, despite privacy groups' concerns, could lessen the impact of privacy issues in any review. Privacy groups actually expressed concern that lack of action in the DoubleClick deal would open the door to other mergers.
Overseas Antitrust: This is potentially the deal's biggest barrier. The European Union has been much more aggressive against Microsoft on antitrust and privacy issues than the U.S. has. The question is whether the merger of two search-engine providers would attract the same level of scrutiny as earlier merger and antitrust reviews, especially if the EU gives the go ahead to the DoubleClick deal.