A Microsoft-Yahoo! combination, if it goes ahead, would in theory take on Google's massively dominant position in search advertising (78.6 per cent of UK search according to Nielsen//NetRatings) and internet services by pooling Microsoft's engineering and R&D resources with Yahoo!'s more innovative email and online advertising assets.
In the wake of the offer, Google asked rhetorically on its blog whether Microsoft was seeking to "exert the same sort of inappropriate and illegal influence over the internet that it did with the PC". Google has offered to help Yahoo! avert a takeover. Meanwhile, Microsoft hit back, claiming that the deal would actually create a more competitive marketplace for online advertising. But would this combination create a more attractive proposition for advertisers?
There is a number of potential obstacles to any deal, aside from finding a price that satisfies Yahoo!'s management, led by chief executive Jerry Yang. At the time of writing, Yahoo! had rejected the initial $31 a share bid, saying it "substantially undervalued the company" and was reported to be looking for alternative suitors with little apparent success. Microsoft has reiterated its threat to "pursue all necessary steps" to realise the deal, including a hostile takeover appealing directly to Yahoo! shareholders.
Arjo Ghosh, UK chief executive of search marketing iCrossing, expresses a common sentiment among digital agencies that a Microsoft acquisition would be a positive development, if it works. He said: "People in the industry - agencies, advertisers and publishers - are feeling discomfort with this monopolistic situation. If you have a choice between a duopoly and a monopoly, a duopoly is better."
Edward Cowell, chief technology officer, search, at marketing company Neutralise, agrees that the merger would create a duopoly in search, with potential benefits from the advertiser's point of view. "If the deal goes through, it will open up a lot of possibilities from a search advertiser perspective, which could help them jointly increase revenues."
Cowell said these included aggregating user databases for increased ad-targeting sophistication; maximising advertiser revenues across all their websites; acquiring search patent portfolios (with possible leverage over Google); and owning possibly the web's biggest portfolio of different websites.
Not everyone agrees. According to Neil Morgan, the vice-president, EMEA, of Omniture, the proposal would actually reduce choice for advertisers, following the acquisitions by Microsoft and Google of aQuantive and DoubleClick respectively. "What this really means to advertisers is a significant reduction in choice of online media. As online media buying moves to a duopoly, it will become ever more important to have an independent approach to the measurement of the results of digital advertising."
Combined assets
A successful bid for Yahoo! would follow Microsoft's acquisition last summer of the aQuantive digital marketing platform, which includes Avenue A, Atlas and DrivePM. The buyout would add to these assets Yahoo!'s recently acquired ad targeting network BlueLithium and ad exchange Right Media.
Ghosh said Microsoft would need to combine these ad-serving platforms, while providing an overarching vision for Yahoo!'s portfolio of branded content, one that has so far been lacking: "Yahoo! is much more of a media owner - with a lot of entertainment content that neither MSN nor Google have. It also has some great tier-one assets - Flickr, deli.cio.us, one of the best email tool sets, deep penetration into finance, news and travel, yet it doesn't seem to be able to organise it around a compelling message. MSN has world-class mapping software, which can strongly compete with Google, and has invested heavily in search technology with little reward so far."
The combination of the two companies' media and advertising assets, along with their portals, email, and mobile services could create a dominant position in display advertising. Google has struggled to make headway in display.
However, Gal Trifon, chief executive of digital marketing company Eyeblaster, was unsure the proposition would resolve the split in the online ad market between Google-dominated search and display and brand advertising, where Yahoo! is stronger. "If you're in the business of buying and delivering advertising online, the proposed Microsoft acquisition of Yahoo! can be baffling. Two tribes are emerging - one dominating direct response and search, the other leading brand advertising and display. Is this separation good for the industry?"
Ghosh sees a very clear demarcation in how the two companies go about making money from the internet: "Google is monetising the journey - search - while Yahoo! is monetising the content. But search is the navigation of the internet, and if you don't address the search issue, which so far Yahoo! has not been able to, that leaves it to Google.
He adds: "Yahoo!'s vision has been that it wants to be the number-one entry point to the internet, with people engaging with it as a brand. It doesn't seem to have the vision to put that together coherently. If MSN has a vision for how to put the whole thing together, it could be compelling."
Culture clash
But Ghosh also questions whether the "MSN corporate culture can co-exist with the start-up dotcom culture of Yahoo!".
Some suggest this culture clash could see many Yahoo! staff voting with their feet and leaving the company for its nemesis, Google, down the road in Silicon Valley. Cowell warns there is "the potential that the merger between Yahoo! and Microsoft would be costly and extremely difficult. You are trying to combine one of the world's biggest users of open source and Linux-based technologies with ... Microsoft."
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