In the time that Microsoft and Yahoo have discussed working together, first through an outright acquisition by Microsoft and then in various piecemeal deals since, the Internet world as we know it has dramatically changed. A full blown recession has hit, and while it makes sense to have a viable competitor to Google, it’s like wishing for AT&T mobile phones to not drop calls. Most people have given up on the notion and figured out how to live their lives instead of hoping for something that will most likely not happen, or at least something that would happen in a time frame to make a difference. Even the announcement of the two companies entering into a ten-year pact won’t happen right away, and there is no guarantee that it will still happen once the companies start down the road of integration. It’s hard enough to get three people to agree how to work let alone companies with tens of thousands with no history of working together. On a scale of 1 to 10 with 1 being the ease with which a stripper can part a man with his money and ten being negotiating a peace deal in the Middle East, having this deal realize more than the current sum of their two parts, tips in favor of the right half of that scale.
The story line here is a good one. The king of software is losing ground. It has an amazing core business which after years of unprecedented success has peaked. Not only has it peaked but the company is losing (has lost) the multi-billion dollar internet advertising race, which is not entirely their fault. While Google gained monopolistic share, Microsoft had to keep paying out hundreds of millions in fees and almost as much in legal expenses for their prior success. It’s hard to focus on a new foe when you are getting stung. But, Microsoft just won’t give up, and it’s almost a shame that they have the cash to keep throwing at this project, because they have. They don’t have the reach, or even a profitable internet business, but they finally have a core search technology that doesn’t suck. Now, they just need more people using it, and naturally that’s where Yahoo’s 20% share comes in. They have the users but no real organic search technology to speak of, so in theory, they have nothing to lose. Bing results won’t be any worse than the ones their users already receive, and as we’ve seen, people who use a service stay in that service.
That Google makes more than $20 billion per year would drive any company with superiority complex to want to compete, especially when that company made a fraction of that as recently as 2004. Lucky for Microsoft, Yahoo turned down $47.5 billion 16 months ago and even a $9 billion pre-pay. Now, with the market where it is, they get the deal on revenue share. But, they got a deal done, and in only six months; whereas, those previously at the helm of Yahoo, couldn’t or wouldn’t. The biggest loser, though, is not Google but Yahoo. Given their track record on search – being in the lead and buying the originator of the PPC (Overture), they’re basically throwing in the towel without any certainty that they will make more. And, as if working at Yahoo hasn’t been challenging enough over the past five years, imagine those who have given their time and energy towards trying to make Yahoo competitive in search (all of those part of making Panama a reality for instance). As reported by the AP, "By spending less on its own search technology, Yahoo expects to boost its annual operating profit by about $500 million — but not until 2012, when the two companies expect to have all the pieces of a complex technological puzzle in place." Given that eventuality, how do they expect the current machine to even work until integration happens? It’s a good thing Yahoo users remain relatively unaware of the behind the scenes mess that so many have experienced.
While Microsoft goes after Google’s core business, the reverse is happening too. Part of this story will be seeing which company succeeds best. In the meantime, the multi-billion dollar, annually, battle for display remains almost anyone’s game. Yahoo has long been seen as a natural contender, and they have made several acquisitions in the past to try showing a desire to create leadership. They are no closer than Google, but at least they are no further away. Search is a crucial asset in that battle. The barrier between search and display will continue to erode as placement becomes placement. It’s not like radio versus TV where the mediums are fundamentally different. To succeed in that battle, Yahoo must continue to have access to the data that search provides, and they should have made a reverse deal giving them equivalent access to the display inventory owned by Microsoft on a rev share basis. That way, Microsoft focuses on technology and Yahoo sales and inventory growth. As for the little people in the performance marketing space, let’s hope that the implementation of Microsoft AdCenter means finally getting rid of the negative of Yahoo Search, trying to do business with them. If they can finally automate the process, it will open up a new even if brief era for prosperity. Let’s hope that pre-loading campaigns in Microsoft now means access for when the inventory comes online next year.
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