Can This MSFT/YHOO Deal Go Through?

I'm still waiting to read a dissection on the regulatory aspect of Microsoft's bid for Yahoo.  I can't see this deal going through without problems.  Microsoft's dominance on the desktop, their reach with aQuantive, and now Yahoo?  That's what I call a privacy nightmare in the public's view.  I'm not saying that there aren't companies that know more about you already today, but the perceived threat here is something that I don't see regulators and privacy groups letting go easily.

Second, lots of people are saying that this is a search play, as both companies have well established portals with enough scale.  Is this something to be bullish about?  The way I'd break this down is by looking at core search technology (both algorithmic and paid), distribution agreements (yes, those are worth money), and owned and operated search. 

For algorithmic search technology, it's interesting to note that they've effectively acquired the whole of Fast Search and Transfer-- they recently acquired the enterprise search side and now they will get the consumer search side, which Yahoo bought way back.  They will get core search technology knowledge from Inktomi, Altavista, etc. 

On the paid search side, they'll get the Overture properties with the new and improved Panama work.  One area where I could see dramatic consolidation and cost savings is the paid search platform.  It'll be interesting to see how they roll up the business here.  Folding this into their digital ad exchange model might be a long term project but I'm sure that's the goal here.  They aren't planning to run discrete markets.  While I'm sure Microsoft will gain some users by combining the search advertising businesses, I'm sure many advertisers are already on both systems. 

The impact on distribution will be better, as they won't be competing against each other to win deals in the future-- they'll only be competing with Google and to a lesser extent, IAC.  However, I'm trying to figure out how the ISP distribution deals would welcome this-- they are not surrounded by MSFT so they must be a bit more uncomfortable.  Depending on the scale and the improvements they can eke out on paid search monetization, I think to a large extent that distribution partners love the thought of getting bigger checks for their rev share deals. 

I think owned and operated is the tricky part here.  Yang's committed to getting Yahoo to become not only the start page of the internet, but also the page that you don't leave if you want to perform a search.  To the extent that Yahoo can be successful will be largely dependent on the quality of their start page offering as well as the way the way they execute search product offering for their sites.  Can they get people to stop leaving Yahoo.com and typing in Google.com to perform a search?  I still argue that there is a perceived difference between the quality of search offerings out there.  Perceived or real, it's something that MSFT will have to address if they want to compete with Google.   Otherwise, they won't be able to move the needle on search share unless they  really step up their marketing efforts or some other thing.  But as Google has shown, the focus on consumer/product has better payoffs over the life of a user. 

More later. 

Comments

[Terrence Thomas]

Spot on analysis and I am glad I stumbled on to your blog. I am now a subscriber. In my opinion, there are three key growth areas for search (paid and algo)

1. Increased usage
2. Share shift
3. New distrubition

Google, in my opinion, has won the consumer, but the general mass market consumer perception of Google still is it is very utilitarian. Google has also won publishers via its syndication and distribution model. Since the CPM portion of the Google syndication network makes up a small portion of their total revenue, I will also look at their publisher syndication as utilitarian.

So when analysts say this acquisition is due to search, I don't buy this. The fact is, MSN's and Yahoo's eyeballs are drawn because of portal inertia and email. The last frontier, and I do not know who has a leg up on this, is the combination of integrating content distribution and advertising seamlessly- and on a massive scale to eyeballs that will sit and engage with it and interact with it at the same rate or more than television.

The promise and lack of delivery of contextual ads or behavioral targeting is not where the battle is. The battle lies in creating experiences where we can use the precision of search, the engagement of television and the reach of the net to deliver hyper targeted and relevant ads in a way that does not exist today.

The recent aquisitions of every behavioral ad network worth buying (and worthless ones), the combo of Microsoft/Yahoo and the Google/Youtube acquisition point to this convergence. Once this convergence occurs, the entity that controls the delivery of ads and content (video, text, etc) will be able to price along every advertising tier (e.g. brand pricing, direct response pricing, etc) and unlock untold scores of advertising revenue. Since Google is not in the repackaging of content (outside of UGC), I believe their hurdle is higher to climb, but there is going to come a day, where both live and repurposed broadcasts will come to the web and traditional media will not play a role in its distribution. Unfortunately, I can't say who is in the lead on this, but the opportunity is enormous.