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Sunday, April 06, 2008

Oh Yes, Microsoft's Still Interested -- And "It's About Search, Stupid."

So my long exploration of a future rosy scenario for Yahoo to stay a strong and beloved second place in the search engine race (remember, they're still #1 or #2 in a fair number of verticals and niches) left part two unfinished.

Part 1 was about search, and the consumer, and how some at Yahoo still "get it" better than just about anyone in the world.

I still haven't dropped the other shoe about exactly what partner might be better than Microsoft to help them build that. In Yang-like fashion, I'll get around to it.

But let's be clear about this much - assuming you already have a grasp on the fact that Google currently has dominance of search to the tune of 60-85% market share, depending on the market. Yahoo is #2 in search. Microsoft is no longer a close third place in most markets. They're a distant, unimpressive third. Especially unimpressive given the investment and resources they've put in thus far. It's tough out there.

So: why does Microsoft want Yahoo so badly? Why is all the current "jawboning" about Yahoo being a weak company lucky to have such an inflated bid not cause Microsoft to waver from its effort to acquire Yahoo?

Because when it comes to search, and anything that looks like search, Microsoft is desperate to buy into what they haven't been able to grow organically. As things stand, they're being squeezed nearly into oblivion, which really doesn't bode well for the company's future. They're looking to make a strong transition into anything scalable with an advertising dollar attached.

An indicator of this avid interest is: if you work in the search advertising industry, you may have had Microsoft people - whether they are directly working for Microsoft, or for a market research firm, PR firm, "agency of record," or some other subtle offshoot - sidle up to you and ask you what it might take to move some of your clients over to Microsoft adCenter. Or begin talking about it more in articles. Or generally mention them, in a slide or two in a seminar. "I mean, after all, we boast the highest ROI of any of the major PPC vendors... right?" And the platform is interesting and innovative, even if the overall ad buying experience has its shortcomings. To the above, agreed. But:

Usually the SEM's answer is something along the lines of: "Look, you've got 10-11% share on paper, and in the real world of searches, sales and leads for any given client, more often than not it's closer to 5%. If this drops to 2%, it's even worse, but even at current levels it's a tough sell. It's not quite on the radar for many clients. And therefore, not for us, as much as we'd like to see more competition and cool bidding features."

The conversation continues from there, and some nice things may be said about good intentions to work together. The eerie thing is, the Microsoft-associated person won't dispute your 5-6% number; maybe not even the impending 2% market share scenario. It's as if they know you're right. They're more self-aware than, say, Ask.com execs were three years ago.

Letting things go in that direction puts a huge crimp in Microsoft's style. To be able to fully and properly represent themselves, their many products and services online, they need some advertising reach and access to search visibility that isn't diabolically controlled by archenemy Google. They need access to the subtle forms of public mindshare that only search and related advertising inventory can provide. (Think that's why they overpaid so much for a 1.6% stake in Facebook? You think?)

So look around at who they can buy to boost that search market share way up. And at the same time, who holds a ton of other targeted ad inventory. There's only one: Yahoo. No one else. Except maybe Facebook, which stake Microsoft might seek to increase at a more favorable valuation than the first.

To achieve this objective, Microsoft has decided it will pay a premium, and I don't see chatter about weakening market conditions, and other claims that Yahoo isn't in a desirable position, as likely to cause them to undecide.

Microsoft's resolve to do a deal seems pretty clear.

The question remains: does Yahoo have any alternative?

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Posted by Andrew Goodman




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