Microsoft announced yesterday that it has made a $44.6 billion unsolicited offer to buy Yahoo! The bid consists of Microsoft stock and cash, and represents a 62% premium over the closing price of Yahoo!’s stock on Thursday. While the transaction will be scrutinized by the Federal Trade Commission, the Department of Justice, and European regulators for its anti-trust implications, the transaction will be approved assuming the deal goes forward. Simply put, a Microsoft — Yahoo! combination increases competition in the online search and advertising markets. Now let’s get to what this means for you and me.
Why does Microsoft want to acquire Yahoo!? The answer is simple–online advertising. In the words of Steve Ballmer in an internal email to Microsoft employees:
This year, online advertising is a $40 billion business. It will grow to $80 billion by 2010 and will continue to increase in the years beyond. This market provides a significant growth opportunity for Microsoft�our ability to provide the best search and online experiences for consumers, and the best ad platform for publishers and advertisers, is the key to unlocking this opportunity.
Source: Read the entire email at TechCrunch
What a successful Microsoft — Yahoo! merger means to the online advertising and search engine market is more competition. Some will argue that even with the Yahoo! acquisition, Microsoft will fail to present a serious challenge to Google. The merger will certainly be the biggest challenge Microsoft has ever faced (perhaps aside from the federal government’s anti-trust lawsuit a few years back), and Microsoft has proven that it is not the most nimble of companies when it comes to embracing the Internet. But I believe Microsoft will rise to the occasion for two simple reasons: (1) it has plenty of cash to throw at online advertising and search engine technology; and (2) the future growth of the company is riding on this merger (see Ballmer’s email above). So what would real competition in the online advertising and search engine technology markets look like for you and me.
A Microsoft — Yahoo! merger is good for bloggers
Google dominates the online advertising market. The business model is simple: Through Google’s Adwords program, advertisers place ads on Google search result pages and on blogs and other websites that choose to run Google ads. Advertisers pay Google usually based on the number of times their ads are clicked, and Google in turn pays a portion of this revenue to the blogger or website owner running the ad. It’s in Google’s interest to receive the highest prices it can from advertisers and to pay the smallest portion of this revenue on to the blogger or website owner. Enter Microsoft and Yahoo!
Microsoft wants more of the online advertising business. To get it, it will do two things. First, it will undercut the prices that Google charges advertisers in an effort to pull ad revenue away from Google. Second, it will increase the portion of that revenue it pays on to bloggers and website owners. Why? Attracting advertisers won’t do Microsoft any good if it doesn’t have websites on which to place the ads. And we have a simple gauge to determine whether this strategy is working–Google. If and when Google follows suit with lower prices to advertisers and higher revenue sharing to publishers, than we know Google views Microsoft as a legitimate threat. By the way, Google’s 8.5% drop in the market yesterday suggests that investors see the Microsoft — Yahoo! merger as a real threat to Google.
A Microsoft — Yahoo! merger is good for the Internet
Lower prices are not enough to challenge Google. Microsoft must challenge Google’s dominance in search engine technology. When we use Google or other search tools, we want to find what we’re looking for quickly and easily. And advertisers only want to see there ads on search engine results pages and websites that make sense for what they are selling. Imagine trying to accomplish all that based on a few words typed into a search box. If Microsoft wants to present a serious challenge to Google, it must innovate in the search engine technology space.
When most of use think of innovation, we think of Google, not Microsoft. In fact, this quote from an interview with Bill Gates in 2005 discussing Firefox is a perfect example of Microsoft’s inability to move at Internet speed:
Well, there’s competition in every place that we’re in. The browser space that we are in we have about 90 percent. Sure Firefox has come along and the press love the idea of that. Our commitment is to keep our browser that competes with Firefox to be the best browser — best in security, best in features. In fact, we just announced that we’ll have a new version of the browser so we’re innovating very rapidly there and it’s our commitment to have the best.
Firefox continues to eat away at Explorer’s market share. But if Microsoft can rise to the challenge, the competition will move search engine and related technology forward at a faster clip, which would be good news for all of us.
A Microsoft — Yahoo! merger is good for Google
How will Google respond to the merger announcement? Are executives working around the clock this weekend to assess the implications of the proposed merger and to chart the future course of Google if a meaningful competitor rises up from the Microsoft — Yahoo! shotgun wedding? I suspect they are, but I’m confident of this–Google will respond. And in the process, Google and the products and services it offers will become better and cheaper. Competition always has this effect on companies and the products and services they offer.
Nearly three years ago Google’s CEO, Eric Schmidt, had this to say about Microsoft as a competitor:
It looks to me like this space [search engine technology] is so large that there will be multiple winners. There’s plenty of room for all the players.
He then went on to identify Yahoo! as Google’s major competitor, saying it has “emerged as the major, major competitor in this space.” Then referring to Microsoft’s then newly launched MSN, he observed that Microsoft is “just getting going.”
I wonder what he’s saying now.
Reader question: Will a Microsoft — Yahoo! merger effectively compete against the Google juggernaut?