Brian Caulfield 02.01.08, 2:47 PM ET
pic
Microsoft Crafts New Mobile Strategy With Yahoo!
Microsoft Finally Gets The Competitive Spirit
YahooSoft Bid Shakes The Start-Ups
Mister Softee Buys Cool
For Once, The Underdog
Microsoft Goes After Yahoo! In Online Advertising
Yahoo! Doesn't Have What Microsoft Needs
Yahoo! Deal's Paper Lions
Analysis: A Messy Marriage, At Best
The Bid: Microsoft Makes Its Yahoo! Play
The Strategy: What Will Microsoft Get?
The Rival: Google, Beware
The Battle: Microsoft Admits Yahoo! Isn't In The Bag
By This Author
Brian Caulfield
Fans Critique Apple
In Pictures: The Social Life Of Games
Facebook's Winning Game
More Headlines
RSS News Feed
Popular Videos
Microsoft's Mega Yahoo! Bid
The Baby Borrowers Buzz
The Business Of Fashion
Reality Cheerleaders
A New Generation Of Gamers
Related Quotes
GOOG 515.90 - 48.40
MSFT 30.45 - 2.15
YHOO 28.38 + 9.20
Most Popular Stories
Schools With The Most Professional Athletes
Greatest Athletic Achievements
Where The Most Wealth Is Stored
Rules On Talking Politics In The Office
Tips On Calling Home From Outside The U.S.
Microsoft and Yahoo! have a big problem. Online ads are booming, and they are getting left out. Microsoft's online business racked up a loss of $248 million during the quarter ending in December. Yahoo! makes money, but its earnings are slipping fast: Net income fell 23 % to $205.7 million last quarter from $268 million during the year-ago period.
Little wonder Microsoft (nasdaq: MSFT - news - people ) bid for Yahoo! (nasdaq: YHOO - news - people ) Friday. While Google (nasdaq: GOOG - news - people ) sucks up the money flowing into online advertising, its two online rivals grow weaker. On Wednesday, Google reported a 17% jump in earnings to $1.21 billion over the year-ago period.
But if search advertising is raining cash down on Google, Microsoft's attempt to fix the problem by buying Yahoo! is like running out into the street and trying to capture some of the downpour with a fork: It's the wrong tool for the job. Call it reverse synergy--both Microsoft and Yahoo! are weak where Google is strong, in search and search advertising.
Investors certainly didn't seem to think Yahoo! would do Microsoft much good Friday. They quickly bid Yahoo! shares up 44.73% to $27.76 from $19.18. By contrast, Microsoft's shares slid 6.17% to $30.59 from $32.60.
Here's the problem: Together, Microsoft and Yahoo! accounted for 15.6% of U.S. Internet visits, with Google accounting for just 7.7% for the week ending Jan. 26, according to online traffic tracker Hitwise.
However, stacking one page view on top of another won't be enough to derail Google. One of Google's strengths is its ability to wring revenues out of Web pages it doesn't own. Google gets more than a third of its revenues from ads placed on other sites, by peddling keyword-based advertising on behalf of everyone from blogs to major newspapers.
More worrying, Microsoft and Yahoo! combined don't even come close to Google in search. For the four weeks ending in January 2008, Google accounted for 65.98% of U.S. searches, while Yahoo! and Microsoft combined amounted to just 27.84% of searches.
To be sure, observers such as Dema Zlotin, founder and VP of strategic services at interactive marketing analytics specialist Covario, see some synergies. While Yahoo! and Microsoft will lag in search and search-related advertising, the two will have the ability to offer display ads against the strong collection of Web sites the two companies operate.
Furthermore, Zlotin expects Microsoft will benefit from many Yahoo! technologies, such as an upcoming advertising bidding service, using it to pour ads into partners it has locked up, such as Facebook and Digg. Microsoft will also likely swap out its search and keyword advertising technology for Yahoo!'s offerings, Zlotin says. While Yahoo! lags Google in search traffic, it has invested heavily in efforts such as Panama, which promise to better match ads against search queries.
The problem is that while Yahoo! and Microsoft have made huge strides in their ability to turn search queries into dollars, even combined, the two companies simply don't have the search traffic to keep up with Google. And it is search that is propelling the Google juggernaut forward.
