• by Diane Mermigas , February 5, 2008

Google is ferociously protecting its dominance of the burgeoning online advertising market--including trying to thwart Microsoft's proposed $45 billion buyout of Yahoo.

The only explanation for Google's scathing criticism of Microsoft's bid--at heart, a grab for display and search ad share--as well as its offer to align with Yahoo in a defensive play, is fear and loathing. Google does not want the unprecedented market competition that a combined Microsoft-Yahoo represents.

The ultimate irony is that Microsoft and Google are being driven by the same fear and greed: a penchant for market monopoly, a passion for manipulation and an obsession with losing a strategic advantage. Both companies understand that interactive advertising and commerce will provide the golden profit pipeline.

Microsoft's knockout bid for Yahoo is a stunning admission that advertising platforms and engines, hinged by search and social networking, are more strategically significant than their operating systems. Google has been advancing its efforts the past year with its DoubleClick acquisition and an Open Handset Alliance to promote its free software to tech companies. It has a good chance of winning the ongoing bidding for wireless spectrum--a nearly $5 billion bet that it can make many times that managing user data, advertiser pitches and online transactions in its own branded space.

Google knows it has to secure advertising and commerce opportunities everywhere. Google is furiously making pacts with key media and platforms, access and advertising partners to avoid putting its business model at risk, analysts say. Google reported last week that its annual revenue growth rate continues trending downward.

Not surprisingly, Google CEO Eric Schmidt is openly taking aim at selling advertising and subsequent transactions on the world's 3 billion mobile phones and other portable devices, as well as television and radio space. Google's objective is to grab 10% of the nearly $1 trillion in global advertising to boost its annual revenues to $100 billion. Its fiscal 2008 revenues could hit $24 billion, about $22 billion of which will be advertising-related.

Google and Microsoft also are fortifying their online ad-dependent positions in search and social networking. That is why an aQuantive-fortified Microsoft takes a minority stake in Facebook, buys up small Internet advertising firms, and pursues Yahoo. Their combined online search market share will top 30% and still be less than half that of Google.

Still, Google will be forced to share. The 10-year-old $180 billion company is so pervasive and influential that its core business competencies are on virtually everyone else's must-have, must-hate lists.

If the deal goes through as expected, look for Google to ramp up its search-based personal data mining and marketing across all digital interactive platforms. It will bore deeper into tracking and reporting on users' Web selections and activities. Auctioning premium connections with target consumers and mining the long tail of products and services is Google's new advertising industry paradigm.

Calling television's mass-market commercials an expensive "waste of time," Schmidt has proposed changing the static system with targeted, measurable ads that would give Google access to television's $74 billion advertising market and the $20 billion radio ad market.

Also, as a result of the more formidable competition posed by a combined Microsoft-Yahoo, interactive advertising and commerce will develop more quickly. Both Internet giants will continue to aggressively invest in social networks. Google has a 5% stake in AOL and a new pivotal partnership with MySpace. Microsoft will leverage its minority stake in Facebook and all of Yahoo and its strategic partnerships. Combined, Yahoo and Microsoft own the first- and third-ranked most-visited sites on the Web.

All such competitive responses will be good for Web business. They will increase the overall advertising dollars spent on the Internet from less than 10% today. The overall online advertising market could reach $28 billion this year--$11 billion of it in search and $6 billion in display, according to eMarketer. It will top $42 billion by 2011.

But not everyone is a winner yet.

Google's hypocritical complaint about Microsoft posing a threat to open, accessible interactivity as the Yahoo owner damages Google's credibility and stock price. Google shares continued to fall Monday below the $500-a-share level it traded at last August.

Amid the flying barbs, Google and Microsoft would do well to heed one of the more powerful lessons of the Yahoo battle: When you fail to play smart and fast, you lose the right to deal. Technology intelligence, enterprise and access to capital are not enough to assure success. Having missed the opportunity to acquire Facebook for $1 billion two years ago, Yahoo founder CEO Jerry Yang now has little option but to sell. He long resisted the easiest move of all: partnering with either Google or Microsoft to sell its search ads.

Schmidt's own words may come back to haunt him. In a recent New Yorker interview he pondered the controversy and ill-will directed at Google by companies threatened by change. "When you have a technology that is as engrossing as the Internet, you're going to have winners and losers," he said. "I'm not trying to sound arrogant. I'm trying to sound rationale about it ...What kills a company is not competition but arrogance. We control our fate."