Analysis: Quick Deal Critical To MSFT's YHOO Bid As Online Ad Markets Set to Double Over 3 Years

By Tom Foremski - February 1, 2008

Over the next three years Microsoft predicts that the online advertising market will double from $40 billion in 2007 and reach $80 billion in 2010.

If Microsoft fails in its bid for Yahoo! it will be locked out of much of that money because of its inability to significantly increase traffic to its Internet businesses.

Search services are a strategic business yet Microsoft is in a distant 3rd place with 9.8 per cent of the market, compared with Yahoo with 22.9 per cent, and Google with 58.4 per cent.

Yahoo has ben mired with slow progress in technology initiatives and internal turmoil as it tries to rebuild its management teams and reorganize its business groups. However, with such a massive surge in online ad money, Yahoo! can profit handsomely even if it continues to struggle with its reorganization.

The risk for Microsoft is that Yahoo's financial fortunes will quickly improve and make its bid of $44.6bn offer look miserly rather than generous. This is why the 62 per cent premium in Microsoft's offer is designed for a quick deal.

But Yahoo shareholders could be losing out on a much larger valuation as the online advertising money floods into Yahoo's Internet businesses. Google might lead in search but Yahoo's web sites get more traffic than Google. All that online advertising will be seeking content inventory and Yahoo can provide that in a way that Google cannot.

Despite its struggle to reorganize Yahoo is better positioned than either Google or Microsoft in terms of winning a major share of the $40bn in new advertising. Google's business is constrained by a maturing search services market and Microsoft has hit a wall in improving its share of search and Internet traffic.


                   

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Comments (3)

Just hire every Google employee for $2.4M each!:

WISDOM OF CROWDS?

If independent crowds of people have a greater collective Wisdom than any brilliant individual, as the success of search engines attest to, then the "crowd" clearly seems to vote against the merger. What else could MSFT do with $40Bn in the next two years to defeat Google (assumed amount of time to achieve incremental earnings/synergies from Yahoo)? This would be a more entertaining subject. Here are some ideas to start:

--Pay $2.3M to every 16,805 Google employee to join Microsoft...I guarantee that's worth more than their salary plus stock option value over the next two years! After all, Google is only as valuable as its people--not its servers.
--Offer every US citizen that's online (guesstimate of 175M), $229 to use Live/MSN only. I wouldn't.
--Give free Zune's to every connected American. I would give mine away, and stick with iPod.
--Pay every user a sales commission that purchases products/services that are advertised via Microsoft online ads

I like the idea of just hiring every Google employee for $2.38M!


Tom Foremski:

Better to pay each Yahoo user $100/month to use MSFT properties. GOOG employees are already wealthy enough plus there would be plenty more to take their place...


YaSoft! Good. MicroHoo! Bad

There are enormous synergies in this merger, and many benefits for advertisers. It will work if Yahoo! remains the "face" of the combined entity to consumers (not advertisers).

Yahoo! has a strong consumer franchise, and technically very strong search and advertising match capabilities.

It's the relationships with consumers (not the people who actually pay Yahoo! for ads to appear) which is the key in all this. Microsoft can't come close to the loyalty of the people who use Yahoo!'s consumer services (portal, email, search, etc). Nor can Google, incidentally!

Yahoo! is let down by unfriendly and inefficient processes and services for its advertisers. This is why it generates advertising revenues, but is not great at generating good profits.

Microsoft will be able to re-organise and improve the processes of Yahoo!'s advertiser-facing operations, and there will be true synergy.

Digital Marketing blog - YaSoft! or MicroHoo! ?


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