• by Dave Morgan , Featured Contributor, May 8, 2008

The music plays on. Until this past Saturday, it appeared that two chairs were about to be removed from the game of musical chairs otherwise known as the "consolidation of the online ad industry." With a merger of Microsoft and Yahoo, two of the industry's largest "acquirers" would have become one, and one that would have been so consumed by integration issues that it was unlikely to have had appetite for any other major acquisitions for another year or two. Well, fortunately for the dozens of wannabe "acquiree" online ad companies out there, Steve Ballmer's weekend letter to Jerry Yang made it pretty clear that he's moved on, and Microhoo won't happen.

Yes, I know that many pundits speculate that it was just a negotiating tactic, and that he will be back; but I don't think so. To me, it seemed like Ballmer was already losing his appetite for the deal, even two months ago. Whether it was the aggressive moves by Yang and his team to avoid the deal; or the realization that integrating Yahoo would be 10 times harder than integrating aQuantive -- which has apparently had its issues; or whether it was classic buyer's remorse, Ballmer's recent rhetoric and body language was already creating distance from the deal. He won't be back; unless, of course, Yahoo's stock is in the sub $20 per share range and Ballmer feels that he can pick up a bargain on the cheap. Even then, I am sure that he would only do it once Yahoo stock was stuck in the teens for months.

So, what happens next? I think it's pretty clear that we are going to see a number of modest-sized acquisitions by the Big Four (or Five), and probably see some of them relatively soon. Here is why:

 

• Several sub-scale search players. There are several sub-scale search providers, from Yahoo to Microsoft to AOL to Ask. Search is too valuable, and is more valuable at more scale, so they can't all stay independent from each other for long.

 

• Scaled audiences with sub-scale monetization. Yahoo isn't the only company that has a large audience and monetizes it at a rate well below Google. Peter Chernin made that confession yesterday with respect to News Corporation's MySpace and the entire social network sector. Facebook is in that same boat, as are most of the top 20 audience Web sites, with notable exceptions like Weather.com and NYTimes.com/About.com. Look for some consolidation here.

 

• Scaled monetization without scaled audiences. There are a number of companies with strong monetization capabilities with no or little ownership of audiences. From big folks like ValueClick and Marchex to vertical players like Travel Ad Network, the ad network space has a lot of players that could benefit from getting into the audience business to increase their margins and their defensibility. Watch folks shift their business from broker/agent relationships to becoming a principal in the business. Watch for more folks to make moves like UGO did over the past few years, as it shifted from an ad network to a hybrid network and destination site. And yes, I do think that Google will do this as well, looking to own more and more of the second and third clicks.

 

In case you are wondering, my "dodged bullet" reference in the column's title does mean that I think merging Microsoft and Yahoo would have been a bad deal for Microsoft and Ballmer. It was way too expensive. The best talent would have fled. The integration would have been horrific. And, most importantly, it would have certainly taken "oxygen" away from any number of internal R&D projects that could have had more meaningful impact on Microsoft's long-term business. Any innovation that was going on at either company would have suffocated in the integration process. What do you think?