Microsoft may lose ground
2008-02-08 14:01
San Francisco - Microsoft's plan to buy struggling Yahoo Inc for $44.6bn could cause the software giant to lose ground to arch-rival Google in the race to develop next-generation internet advertising technologies.
Microsoft Chief Executive Steve Ballmer has argued that his plan to snap up Yahoo would create a more competitive internet search and advertising marketplace. He pointed out that Google controls about 75% of the worldwide search advertising market, compared with 18% for Microsoft and Yahoo combined.
Financial and industry analysts agree that Ballmer's bid could be Microsoft's best chance to narrow that gap with Google, but a growing number are expressing concern that a merger would distract Microsoft and Yahoo at a critical moment when internet giants are focused on creating systems that will allow advertisers to easily place ads on all types of media, including the internet video, cellphones, radio and television and print publications as well.
"By the time they manage to integrate, Google will be so far ahead in the next chapter - be it mobile, online video, or moving to offline channels - that Microsoft and Yahoo will again be playing catch up," said Shar VanBoskirk, an interactive marketing analyst at Forrester Research.
Ballmer has said his plan to acquire Yahoo would enable Microsoft to boost revenue by consolidating users and squeezing a greater number of ads through a single platform, resulting in more vibrant keyword auctions and higher prices.
He argued it would also give Microsoft the scale it needs to improve its search technologies, develop a more innovative advertising platform and invest in emerging mobile, social media, video and entertainment products.
Microsoft's goal is to carve out for itself a much bigger chunk of the online advertising market, which the company expects will grow from $40bn in 2007 to nearly $80bn by 2010.
'That is going to be tough'
But sceptics are increasingly expressing concerns about the challenge Microsoft will face as it tries to win over Yahoo employees, merge two corporate cultures, integrate operating groups and then figure how to come from behind to challenge Google.
Moreover, analysts such as BMO Capital Markets' Leland Westerfield argued that a lengthy and complex regulatory approval process could prolong the uncertainty through the middle of 2009. Doubts about the merged company's path forward would surely prompt employees from both companies to start looking for opportunities elsewhere.
"They have a poor track record, a weaker starting position. Now you have a potentially ugly and hostile merger to integrate. That is going to be tough," said Rob Sanderson, analyst at American Technology Research.
Yahoo has yet to decide on Microsoft's offer, but concerns about Microsoft's ability to fully capitalise on Yahoo's assets have already driven the software giant's shares down about 12% since its offer was announced last Friday.
Microsoft and Google declined to comment for this article, but Barry Diller, Chief Executive of IAC/InterActiveCorp, parent of search engine Ask.com, noted: "I doubt many people at Yahoo can concentrate fully on innovation at the moment and I think probably the same is true...at Microsoft."
Microsoft and Yahoo have made expensive and time-consuming bids to catch Google on their own, efforts that have clearly not succeeded. For example, Microsoft last year spent six billion dollars for online advertising group aQuantive Inc, including a system called Atlas that delivers online ads to websites and manages them.
Yahoo recently rolled out a long-awaited system called Panama, which enabled the internet giant to generate more search advertising revenue but failed to live up to expectations.
Win over big brand advertisers
A merger would give MicroHoo a significant jump on Google in the online display advertising market, with a market share of about 30% compared with Google's 2%. The two already offer more integrated advertising packages, giving advertisers the ability to buy both search and displays ads. Analysts said Microsoft would also move to leverage Yahoo's cellphone platform and its rich media advertising network to expand its capabilities.
"The common goal of these companies is to get beyond the limitation of any particular medium," said Andrew Frank, analyst at Gartner.
Frank said the biggest opportunity for Microsoft and Google will be to win over big brand advertisers that are looking to allocate an ever increasing portion of their ad budgets for display and rich media internet ads.
But to do so, internet companies will need to build up their sales staffs, upgrade billing platforms and provide additional support services to help agencies and brand advertisers make the transition from traditional media to digital advertising, he said.
Analysts said it was hard to imagine Microsoft being able to improve its search technologies and juggle all these balls in the midst of a merger integration process.
"The disruption...could possibly inhibit Microsoft from fully capitalising on these newly acquired assets in a time-sensitive manner, thus providing Google the opportunity to further consolidate its position in the marketplace," Westerfield said.