Media: All about ... Microsoft's Yahoo! bid

Yahoo! has a big fight on its hands to repel Microsoft, Alasdair Reid writes.

For many observers, Microsoft's $44.6 billion bid for Yahoo! last week was charged with all manner of symbolism. After all, these companies are the closest the digital business has to heritage brands - although, admittedly, one does possess a slightly more alluring heritage than the other.

In recent times, we've pretty much managed to come to terms with the fact that Yahoo!, which has rejected the offer, was on the back foot. After all, its results haven't been a cause for celebration. At the start of February, on the back of a results announcement showing its fourth- quarter profits had fallen by 24 per cent year on year to $205 million, the company announced it was shedding 1,000 jobs, around 7 per cent of the workforce.

Microsoft is another matter. After all, this is the company that was easily vilified as a greedy monopolist, one that had the whole IT sector in a pernicious half Nelson. And, yes, everyone has been aware of the desperate attempts it has been making to reposition itself as a vigorous presence on the internet, rather than as a peddler of infrastructure software - but its bid for Yahoo! has served merely to remind everyone just how far off the pace it remains.

And the weakness of its position can only have been compounded by the fact that, a short time after Microsoft made its hostile move, Google's chief executive, Eric Schmidt, apparently told Yahoo! management that Google was prepared to act as a white knight in blocking the bid.

In comparable situations in other industries, such an approach would appear to be surreal or almost obscene. In this case, reports suggested that Yahoo!'s bosses were actively considering the offer. What price for a genuine challenge to Google if it can position itself as both the market leader and the good guy?

1. Yahoo!, which was incorporated in 1995, was, for almost five years, the pre-eminent search engine on the internet. Then up popped Google and began its inexorable rise. Google offered a quantum leap in quality (Yahoo!'s system never quite gave you what you'd been hoping for), and its user numbers grew astronomically, despite the fact it had been given minimal promotional backing. Its virtues spread by word-of-mouth and, as with many life-changing products, its brand name entered the English language as a generic term. That sort of phenomenon is extremely rare in any field - and Yahoo! was, quite understandably, left dazed in its wake.

But Yahoo! does a number of things that Google has never even attempted to do - namely provide editorial content on its sites and to act more like an old-fashioned media owner, by selling brand advertising (banners and skyscrapers and, increasingly, video ads) against a global audience in excess of 400 million. Some analysts have always believed that as the focus of growth switched away from search - as it is starting to do - Yahoo! would be well placed in the next phase of the market's evolution.

And Yahoo! has been investing in digital ad sales houses to extend its scope beyond the sites it owns. In 2007, for instance, it acquired Right Media for $650 million and BlueLithium for $300 million.

It also stumped up $1.6 billion to acquire the paid-search operator Overture in 2003. And an upgrade programme, codenamed Panama, delivered a revamp of its core search product in 2006. The aim was to make presentation more sophisticated - or, according to cynics, a bit more like Google.

2. MSN is one of the world's most heavily used portals, and Hotmail is one of the best-known e-mail platforms. However, Microsoft's purchase on the advertising market has remained distinctly unimpressive.

Since 2004, it has been investing substantially to gain a more significant foothold, both in search and display. For instance, it bought the online ad sales house aQuantive for $6 billion in August 2007.

3. Yet, if a Microsoft/Yahoo! deal were to materialise, the competition authorities will not exactly be troubled. According to the market research organisation ComScore, in December 2007, Google had an estimated 62.4 per cent share of global search revenues. Yahoo! had 12.8 per cent and Microsoft had 2.9 per cent. The total US search market was worth $8.6 billion in 2007 (there are no reliable global figures) out of a total online advertising market of $21 billion. The search market is expected to double in size to more than $16 billion by 2011.

WHAT IT MEANS FOR ...

ADVERTISERS

- Not a lot, on the face of it. Google will remain the utterly dominant search player, whatever happens. Longer term, however, it's slightly worrying that just as the market has begun to contemplate the next phase of the digital ad market's evolution, two of Google's strongest potential competitors effectively signal that they're in no position to compete.

- But the interesting analysis to emerge from the US market is a notion that, for a number of reasons, not least the online medium's apparent transparency, advertisers need never worry about the price implications of consolidation. It's a nice theory, we shall have to see.

YAHOO!

- Many observers would like to see Yahoo! hold its nerve. Yes, results have been disappointing, but it's still the second-biggest operator in a big and growing online market.

MICROSOFT

- A sobering confirmation of just how quickly things can change in the digital domain. A decade ago, many in the digital community were willing to predict that Microsoft's potential was limitless. At the very least, it could soon control the whole media universe, from content creation to redistribution and advertising. In one sense, it's true. This article took shape courtesy of Microsoft Word, for instance. But in other senses, it's just never going to happen.