Does MicroHoo Have Staying Power?

While the industry scrambles to sort out the potential impacts of Yahoo’s new partnership with Microsoft, the initial response has been generally positive, particularly for the short term.

However, as in most deals that have been as contentious in the making as this one, the real hazards and detours may lurk further down the road.

“It’s a marriage made in heaven,” Rob Enderle, principal analyst at the Enderle Group, told InternetNews.com. “It uses Yahoo’s search share and Microsoft’s technology [and] at least short-term, it assures that Yahoo has a future,” Enderle added.

The obvious gain comes from unifying Microsoft’s (NASDAQ: MSFT) and Yahoo’s (NASDAQ: YHOO) search market share and sharing advertising sales to create a much larger second place competitor to Google (NASDAQ: GOOG).

Under the terms of the deal announced Wednesday, Microsoft will power Yahoo’s search business with its recently relaunched search engine, Bing, while Yahoo will handle search ad sales, albeit using Microsoft’s AdCenter technology to manage ad flow.

Meantime, Yahoo’s larger market share and billings will enable Microsoft to compete more head-to-head with Google.

A good time was had by all

“It’s very good for both companies, scale is very important, especially when you’re going up against a competitor like Google,” Matt Rosoff, research vice president for consumer products and services at Directions on Microsoft, told InternetNews.com.

Web metrics firm comScore’s figures for June — the month that Bing launched — show Google with 65 percent of U.S. Internet searches, compared to Yahoo with 19.6 percent, and Microsoft trailing badly in third place with 8.4 percent. If the deal holds together and passes regulatory approval, the combination would have 28 percent of the market.

“Bing is a good product, but this [deal] immediately increases [Microsoft’s] market share from less than ten percent to more than 25 percent,” Rosoff said.

Even arch competitor Google had something nice to say, at least until the gloves come off.

“There has traditionally been a lot of competition online, and our experience is that competition brings about great things for users. We’re interested to learn more about the deal,” said a statement e-mailed to InternetNews.com by a Google spokesperson.

Also on the welcoming committee, if a bit less warm, was Ask.com, which came in fourth on comScore’s June ratings with 3.9 percent search market share.

“This news is a solid indication that the search market is healthy and growing across the board … but as far as Microsoft and Yahoo are concerned, the primary focus for both for 2009 and into 2010 will need to be on search integration, and not on search innovation. Our core focus will continue to be innovating for success by putting consumers, and search products, first,” Tomasz Imielinski, executive vice president of technology at Ask.com, said in an e-mailed statement.

Next page: Content matters

Page 2 of 2

Content matters

Yahoo also comes to Microsoft with something else — content.

“Yahoo has probably the most visited sites on the Internet,” Susan Feldman, vice president of search and discovery technologies at IDC, told InternetNews.com.

Tim Bajarin, president and principal analyst at Creative Strategies agreed.

“This gives Microsoft and Yahoo a better chance to compete with Google,” Bajarin told InternetNews.com. “I think it’s a very good deal for Microsoft, but it clearly also allows Yahoo to extend its branding [because] they are the number one site that people go to for content and information” he added.

Having a pair of competitors that are more nearly the same size, rather than a situation where there is one dominant player and two relatively weak players, will also likely spur more diversified spending by advertisers, analysts said.

Combining knowledge about what users search on could also be serendipitous. “They can share data about search that can place relevant ads higher, which will lead to higher revenue per search,” Rosoff said.

Potential threats

Despite positive statements by several long-time Microsoft watchers, however, not every observer sees the agreement as mutually beneficial for both companies.

“On the face of it, this is a good deal for Yahoo. To begin with, it would keep the majority of its search ad revenue, and pay only 12 percent of it for Microsoft’s tech services. Two, it would save millions of dollars on data centers, servers, mass storage and telecommunications costs, as well as on an army of expensive search engineers,” said an initial assessment released Wednesday co-authored by IDC’s Feldman and Karsten Weide, program director for digital media and entertainment.

However, the IDC analysts also see a longer-term outcome from the deal that could be a negative for Yahoo — putting all its eggs in one basket.

“Alas, we maintain our position that this deal is strategically unwise for Yahoo. Search will remain the most important online advertising segment for years to come … so, why outsource search development to someone else without any control over that someone else’s work?”

“Once search is outsourced, it will be almost impossible to bring it back in-house. Should Microsoft lose the race against Google in terms of search relevance and ad placement technology, Yahoo’s ship would sink with Microsoft’s,” the assessment said.

Alternately, Enderle suggest that another threat is that the parties could sooner or later have a falling out, likely over money, especially given the deal’s ten year terms.

“That is where this will be tested. It’s a common problem in business where sales and development don’t traditionally get along,” Enderle said.

News Around the Web