Online Marketing Performance

With neither Microsoft or Yahoo able to approximate the success Google has engineered in the online services space, Microsoft made a move some saw coming and some didn’t.  This morning Microsoft put its war chest of cash into play, bidding $45 billion for Yahoo.  The bid represents at 62% premium over Yahoo’s share price at the time of the offer.

With both companies online efforts consistently marginalized by Google’s dominance in search and online advertising and a premium price on the table, it is hard to envision this not happening.

Excerpts from Steve Ballmer’s letter to Yahoo’s board:

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:

Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.

Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.

Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

While Microsoft’s move does imply a failure in its online services venture, Yahoo’s position isn’t much  more impressive.  This may very well be the best things for both companies efforts as well as for the end consumer.  Having a strong, motivated, mature competitor to challenge Google’s dominance will ultimately lead to more innovative, end-user directed efforts.  I’d prefer to see a Micrsoft+Yahoo model scrap with Google in the online services arena than for Google to set its agenda without looking over their shoulder.

Impact

The impact is substantial.  This will create a formidable rival to Google in not only the search and online advertising space, but in the broader, increasingly important online services ecosystem in which all three companies currently jockey for position.

Integration

Insofar as Integration of the two companies, it will not be easy.  While Microsoft and Google clearly have common goals, they do not have common cultures.  I would suspect that Microsoft would handle it not unlike their acquisition of aQuantive, allowing offerings which previously represented distinct companies and offerings to largely continue to function somewhat independently while clear integration strategies are defined.  Both companies are massive, and the transition would take years to be complete.

What’s in it for Microsoft?

• Yahoo’s excellent online brand-reputation.
• Search and online advertising assets and exposure – For search volume alone, the merger would propel them to (just under) a combined 30% search market share, leapfrogging them into a competitive position with Google.
  Online services customer/visitor base (ex: Yahoo Mail, Yahoo Messenger) - Yahoo represents the most trafficked properties on the web.

What’s in it for Yahoo?

• Microsoft has the bankroll to finance an all out David and Goliath battle with Google.  Yahoo simply does not.  If they did, Yahoo would hold a much different position in the marketplace today.
• For Yahoo, search, online advertising, and online services is the basis of their entire business.  Failure in this space hurts Microsoft.  Continued marginalization in this space risks Yahoo’s existence in the long term.

Perspectives on Microsoft’s bid for Yahoo from around the web:

• Microsoft Unveils $44.6 Billion Bid For Web Ad, Search Rival Yahoo (WSJ)
• Why Microsoft’s Yahoo bid makes sense (CNNMoney/Fortune)
• MSFT + Yahoo: What Would Microsoft Yahoo Look Like? (Search Engine Land)
• Paid Search Advertising Drives Microsoft Bid for Yahoo (Search Engine Watch)
• WOW.  Microsoft Offers $44.6 Billion To Acquire Yahoo (TechCrunch)

Tags: Google, Industry News, Microsoft, Online Advertising, Search Engines, Yahoo