Microsoft continued to close the gap in advertiser share with Yahoo. In the third quarter of 2008, Yahoo led by nearly 18% with 30.4%, compared with Microsoft Live Search at 12.0%. By the end of the fourth quarter, this lead narrowed to 3%. This means that 19.4% of all Internet marketers run ads on Yahoo vs. 16.4% on Microsoft Live Search. "Microsoft has begun to close the gap in advertising share with Yahoo, but based on the previous quarter's numbers I would have expected that to take longer," said Rich Stokes, AdGooroo founder.

December numbers show that Microsoft Live Search gained 1.1% share of advertisers, sequentially, compared with Google and Yahoo, which lost about 1% each.

As Microsoft Live Search gains traction, does a Microsoft and Yahoo merger remain a possibility? Despite Redmond, Wash.'s step to withdraw the offer in May, Stokes isn't ruling out the possibility of a follow-up bid this year that creates Microhoo. "Having a critical mass of advertisers is necessary, but you also need a critical mass of traffic," he said. "That's where Yahoo clearly has the lead."

Stokes expects a Yahoo acquisition sooner rather than later. Many had been waiting for Yahoo to hire a CEO, a position Carol Bartz now fills. Having a CEO in place "friendly to Microsoft" would work well, he said. The company "effectively jettisoned" its "poison pill," a policy put in place to give employees severance packages in the event of an acquisition. "The agreement to sour the deal was modified as to not come into play if a company did buy Yahoo," he said.

AdGooroo calculated overlap among top advertisers, which generate 80% of all ad impressions, between Microsoft and Yahoo, and found that combining the companies would increase large advertiser counts on the Live Search network by 157%. This would have a dramatic effect on network cost per click (CPC) due to increased competitive bidding pressure.

Stokes believes that combining Microsoft and Yahoo would raise CPCs. Combining the two company's platforms would take between six months and one year, but could drive more traffic to individual advertisers, cutting their work in half.

While advertiser share is one key ingredient required for Microsoft to take the No. 2 spot in the search marketplace, the other is search traffic--an area where Yahoo continues to maintain a significant lead, about 88 million unique searchers vs. 48 million on Live Search.

How will 2009 play out? The assumption by some industry watchers and analysts suggests that search will fall into the same economic hardship--similar to other industries--by the end of the year. Today, that seems untrue, Stokes said. All indications point to flat or slight decline in advertising revenue in the first quarter of 2009, which follows a typical post-holiday quarter, but should lead to positive growth for the year.

This news story is important. I recommend that everyone read it.