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Paid Search Advertising Drives Microsoft Bid for Yahoo

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The Microsoft conference call yielded little new information about the details of the Yahoo bid. Steve Ballmer stressed that scale and efficiency in online advertising platforms would drive the success of the deal. Microsoft execs said R&D innovations would drive breakthroughs in vertical search, mobile search, social search, and natural language search.

Nice thought; won't work in the marketplace.

More "relevant" search results and social media innovations won't solve the problem of Google's dominance in paid search advertising. Microsoft-Yahoo still need to beat Google brand equity and searcher loyalty. Search is a habit. For some, search is an online addiction.

Switching costs may be low --and search engine alternatives are "one click away" - but Microhoo will still need to win over the Google ravers and junkies.

When Microsoft or another suitor finally buys Yahoo , no one need feign surprise. The Redmond giant finally went public with a formal buyout offer because the Yahoo board (sans Semel) won't fight back. The last bid was rumored to be $50 billion. Today's offer comes in at $44.6 billion because Yahoo stock price dropped below $20 per share.

Look for other bidders to force Microsoft to pay a higher premium. While display advertising is a key driver for creating two super-portals on one efficient ad serving and ad management platform, Microsoft-Yahoo would never win government approval unless Google had achieved what some call near-monopoly leadership in paid search.

Yahoo Panama -- Yahoo's paid search auction algorithm and search ad platform would move to Redmond even if the Yahoo engineers remain in Silicon Valley. MSN adCenter is innovative, but Yahoo Panama improved topline revenue -- although not as much as Wall St. and Jerry Yang would have liked.


Some reports had attributed Microsoft's urgency to close a Yahoo deal to Google's successful bid for DoubleClick. Formal negotiations between the two companies are clearly driven by Google's dominance of paid search and share of searches. Today's conference call confirmed that Google's dominance in paid search advertising -- pegged at 75 percent of worldwide paid search share by Kevin Johnson,

The revenue engine that drives search engines is auctioned paid search (PPC) advertising. As Pay-Per-Click advertising has evolved, traditional banner ad networks suffer from consumer banner blindness. That's led to the rise of behavioral targeting, or more accurately, "search re-targeting" -- another key driver of today's deal.

Neither Yahoo Search Marketing nor MSN adCenter has made significant inroads in creating a search management or web analytics platform to rival those of Google. Microsoft's acquisition of DrivePM, for example, through the Aquantive acquisition was immaterial to MSN search and online advertising revenues.

Microsoft and Yahoo have held informal talks for years -- with neither company making inroads against Google. As recently as May, Yahoo has turned down an unconfirmed offer worth $50 billion to Yahoo shareholders. On the call, Steve Ballmer said the companies have been in talks for $18 months, and confirmed that Jerry Yang had nixed his initial offer, citing timing as the reason.

Given Yahoo's share price, it's unlikely Yahoo shareholders will give Yahoo execs more time to turn around the company's fortunes. Terry Semel's resignation from the Yahoo board last night removes the last vestiges of his controversial reign as Yahoo's chief.

So the pundits and reporters who attribute Microsoft's bid to ego -- "stung" by the success of Google's DoubleClick bid -- don't understand the fundamentals of paid search. Steve Ballmer does -- and he knows he can't beat Google without adding Yahoo's critical mass. It's not about winning or losing a bid for a rival's ad serving platform.

Yahoo and MSN couldn't solve the paid search puzzle. Now, it's costing both companies billions.


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