May 5, 2007 in Business

Plan has Google written all over it

Chicago Tribune The Spokesman-Review
 

CHICAGO — There is a fundamental reason why Microsoft, the dominant software company of the ‘90s, would be interested in buying Web giant Yahoo: to slow the momentum of the dominating technology company of this century, Google.

In a rumor Wall Street reacted to strongly Friday, Microsoft Corp. is said to be willing to spend $50 billion to buy Yahoo Inc., a top Internet portal that’s home to news, entertainment features, e-mail services and fantasy sports leagues.

The pairing would provide Microsoft with the dominant Web presence its in-house MSN brand has had only marginal success filling.

There is no guarantee a blockbuster merger will materialize. Some reports late Friday speculated that talks between the two companies have already halted, while others focused on whether those discussions involved an agreement to share certain resources, rather than a full partnership.

But the idea of a merger generated so much attention partly because of how dramatically the landscape has shifted. Microsoft, once the unrivaled giant, could use help from Yahoo to battle Google’s growth.

While Google Inc. doesn’t have the entertainment Yahoo provides, it has made significant inroads in recent years, thanks to its purchase of YouTube and the successful launch of products ranging from a news service to e-mail.

More importantly, Google has become an advertising powerhouse that would still dwarf a Microsoft/Yahoo pairing in the booming and profitable field of search advertising.

“Buying Yahoo would even the playing field more with Google,” said Ryan Jacob, portfolio manager of a mutual fund that has a 4.3 percent stake in Yahoo. Microsoft has had “little success” in trying to “jumpstart a lot of online initiatives.”

“Microsoft used to be the predator. Now, in certain ways, they have become prey,” Jacob said.

Indeed, Google has been slowly eating away at Microsoft’s core products in recent years. It has introduced word processing and spreadsheet software to challenge Microsoft’s Office suite of products; it offers e-mail tools to compete with Microsoft’s Outlook and Hotmail programs; and a desktop search program that can scan all the documents housed on a personal computer, a tool Microsoft added to its new Vista operating system.

Of greater risk to Microsoft, Google’s programs are free, providing consumers and small businesses with powerful applications that don’t require the cost of a software license.

“Google continues to do very innovative things,” said Gian Fulgoni, the Chicago-based chairman of ComScore Networks. “It’s not clear that combining resources (with Yahoo) really solves the problem of slowing Google’s growth.”

Neither Microsoft nor Yahoo would comment for this story.

Google’s biggest strength is its online advertising, an aspect of the Web the company so thoroughly dominates that it is now expanding into offline products including television, radio and print.

“Google’s power is really one of aggregating ad dollars,” said Rob Enderle, principal analyst of the Enderle Group. “That’s where the focus of this pairing should be, that Google gets a monopoly of advertiser dollars. Google is not in the search business, they are in the advertising business.”

Enderle said scale might be the only way to combat Google’s growing advertising might.

“You would have to build up this huge block of Internet properties,” he said. “This could work if you have an awful lot of property and you can get advertisers to bypass Google.

“But you’d have to be really big to do this. Instead of trying to do what Google is doing,” he explained, “you reduce the value of what Google is trying to accomplish.”

Combined, Yahoo and Microsoft would have a considerable online ad presence.

According to Nielsen//NetRatings, Yahoo held the top spot in March based on image-based ad impressions, such as banner ads, holding 48 percent of the market. News Corp.-owned MySpace was next with 11 percent and MSN’s sites were third at 10 percent. Google is not ranked here because it offers text-based links based on a keyword search, not image-based impressions.

But when it comes to sponsored text links based on a search term, marketers overwhelmingly choose the Google ad platform for linking ads to content. Google would have four-times the market share of a combined Microsoft/Yahoo text platform, the Nielsen//NetRatings data show.

Yahoo’s shares rose almost 10 percent, to close at $30.98 on Friday while Microsoft’s shares fell more than 1 percent, closing at $30.56. Google shares closed at $471.12, down a half percent.

“There’s no doubt that Microsoft is in a battle with Google for the hearts and minds of the Web,” said Michael Gartenberg, an analyst with JupiterResearch, “but to talk about it in the abstract is only interesting. It’s the type of deal where the details will really matter.”


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