Why Microsoft Will Buy Yahoo Search

Microsoft

Microsoft will acquire Yahoo Search, a thought I've been contemplating since the two companies first announced an alliance that this year will lead Bing through a backdoor API to power the Sunnyvale, Calif., firm's search engine by the end of the year.

This morning I received an email from Greenlight, a U.K. search marketing agency. Adam Bunn, who heads SEO at Greenlight, says Microsoft has a good chance of increasing Bing's market share during the year, and it could force the company to pay more attention to SEO. He points to 10 predictions posted last week that suggest that, by the end of this year, search will become a "two-horse race."

While Microsoft's formal agreement doesn't suggest it will acquire Yahoo Search, the undertone in Bunn's note clearly says "buy." So, I thought it time to throw you some ideas on why Microsoft should buy Yahoo search. Aside from Yahoo touting for years that the company is not a search engine, prior to the arrival of Yahoo Chief Executive Officer Carol Bartz, some industry insiders think it could make life a whole lot easier not only for Microsoft and Yahoo, but for advertisers and analysts, who need to keep a closer eye on Bing's budding search business.

Yahoo recorded 17% market share in January, down from 17.3% in December, according to comScore. Microsoft took 11.3% share for Bing, up from 8.5% before launching the search engine last year. In December, Microsoft's search share totaled 10.7% of the search market, which clearly indicates the engine continued to gain share, though Google sits with 65.4% as of January.

It won't surprise Bob Rumpza, president of Rumpza Consulting, if Microsoft does buy its way into long-term control of search marketing and advertising by acquiring Yahoo. "If I had Microsoft's money and was looking for ways to pave the way for my future strategy, I would buy them," he says. "It would give them greater security and more control of the data and interaction with consumers online."

Microsoft's primary strength is its deep pockets and willingness to continue to iterate and improve the technology to keep up with Google, possibly even leapfrog Google with important functions, says Kevin Lee, chief executive at Didit. Yahoo's strength resides in the sales team and online display advertising, rather than search, paid search advertising and the technology that support it.

Yahoo might as well take Microsoft's offer as a way out, which could give it at least an attempt to compete with Google, BusinessCaffeine.com founder Robert Adler tells me. "Microsoft needs to keep gaining market share to keep pace with the momentum," he says. "Yahoo Search Marketing isn't exactly doing that well with advertisers from what I've seen, such as lower-quality publishers, lower-end reach and consistently declining traffic, in general."

Microsoft's adCenter is an interesting platform. While the traffic runs few and far between the desired rates, it always converts high, Adler says.

Yahoo could remain a portal for news, sports and financial information and sell the social pieces to Microsoft, too. David Harry, Reliable-SEO founder, brings up another interesting point. If Microsoft could get its hands on Yahoo's social patents, it would have it made. While Microsoft has many patents, Yahoo has far more for social applications, compared with Google and Microsoft combined.

Harry estimates the Microsoft-to-Google patent ratio stands at about 5:1. "They are ahead of the game in the social world and this certainly might play into it," he says. "It would make them more valuable beyond mere search. Given Google's problems with social, this may even be a good strategic move."

Selling Yahoo Search to Microsoft would also make it easy on Wall Street analysts. My call to Curtis Shauger, senior vice president at equity research firm Caris in San Francisco, reminded him he needs to determine modeling Microsoft's search stock based on this change. The revenue from paid search advertising might one day reap big rewards, but the impact to the earnings per share will likely remain negative in the near term.

"It will be a challenge," he says. "It's hard enough to model segments of any business, and in Microsoft's case you have about six different businesses. It will become a lot of work for very little reward in the short term. I think they will start reporting larger market share for search, which people will view positively, but they are also paying a price for it."

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1 comment about "Why Microsoft Will Buy Yahoo Search".
  1. Barry Dennis from netweb/Omni , February 19, 2010 at 3:46 p.m.

    No way! Yahoo's almost 50 Billion Market Value would just decimate the Microsoft Business Profile. Now if MSN were spun off and became the separate buyer, maybe in a stock exchange, and with MSN adding some-not much-cash to finance the R&D needed to become the next gen Search, well, maybe.
    What would be the point? If Google can lose the traffic race to two-year-old Facebook, and Yahoo to Twitter, WHY? WHY? WHY?
    Note to Steve Ballmer: Don't do it Steve, step back from the brink, Steve, THINK, Steve.
    Steve, there IS a better moustrap, and you can find it.