• by Mark Simon , February 4, 2008

in formally stating its intention to acquire Yahoo, Microsoft is betting $44.6 billion dollars that Google's rule over the burgeoning online ad market can be challenged. While it's too early to say whether its unsolicited bid for Yahoo will be accepted, whether regulatory challenges will appear, and the final shape that an integrated property will take, it's clear that a Yahoo acquisition will significantly strengthen Microsoft's odds of reaping a significant share of future ad dollars, and also preserve competitive equilibrium in the online advertising world.

Here are my thoughts on this deal, which I think makes great sense for both Microsoft and Yahoo:

1. Microsoft built a monster it must feed. When Microsoft launched adCenter in early 2006, its advanced targeting capabilities impressed advertisers -- but its traffic consistently disappointed. Yahoo, on the other hand, has always enjoyed high traffic levels but failed to invest in the technology capable of monetizing this traffic as effectively as Google has. Plugging Yahoo's traffic into adCenter creates a traffic targeting powerhouse that even Google can't match.

Beyond obtaining raw traffic, a merger with Yahoo lets Microsoft double its population of subscribing e-mail users from roughly 280 million (Hotmail) to almost 600 million, an order of magnitude greater than Google's roughly 50 million GMail users. These users, unlike casual search engine visitors, are identifiable, loyal, and fertile fodder for whatever BT or other advanced targeting technologies come out of adCenter's labs. Such users provide a formidable critical mass for the introduction of increasingly "social" features that can be layered over e-mail's basic functionality.

2. Microsoft will control the single point for brand advertisers on the Web. For years, Yahoo's bread and butter has been its popular home page and array of premier properties (including Finance and Sports) which provide online brand advertisers with reach and assurance of adjacency to quality content. Display advertising will continue to represent a sizeable share of dollars shifting from traditional media to online, especially for auto, CPG, finance, pharma, retail, and travel sectors. There are fewer and fewer places to aggregate such an audience on the Web, and Microsoft will now be able to benefit from all of Yahoo's  historical efforts to make itself "the startup page on the Internet."

3. A combined/acquired entity would have fingers in all significant next-generation media. Over the years, both Microsoft and Yahoo have pursued parallel initiatives in the areas of mobile, gaming, search, IM communications, personalization, and ISP services. Being able to remove overlap and focus development for each of these platforms will enhance the chances of success. Looking ahead, Microsoft will be able to take the Yahoo brand into a range of new contexts that would have been impossible to penetrate before, including the desktop (via branded applications), the family den (via Xbox), and as an embedded service within Windows Mobile. These are realms that Google cannot easily infiltrate.

Yahoo and Microsoft, through their various acquisitions of firms such as Right Media, aQuantive (DrivePM) and Blue Lithium, boast the ability to provide a powerful and extensible ad network. Each is already serving ads to external high-traffic sites (Microsoft to Facebook, Yahoo to eBay); integrating these properties will allow a combined entity to finally build an ad network capable of directly confronting Google Adsense.

Finally, from an industry relations standpoint, both companies have historically been careful not to alienate traditional media stakeholders. They have patiently partnered with top-tier content sources, including broadcast media and newspapers, and have nurtured existing ad agencies without demonstrating any intent to "cut out" these existing players.

Some observers of the merger (which in my mind is more of an acquisition by Microsoft than a combination between equals) have questioned whether consolidation from three to two main players will be good for users, advertisers, and the general online market. Having fewer choices is never a good thing, unless of course, the alternative is to have no choice at all, which would certainly be the case should one powerful player be able to dominate the online advertising ecosystem. For this reason alone one must applaud the combined Yahoo-Microsoft entity, which is at its heart pro- rather than anti-competitive

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