Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

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

Posted 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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