Yahoo deal could eat into Google's ad market  

New York, February 2: A combined Microsoft and Yahoo could pose a real challenge to Google overseas and in hot new ad markets such as mobile Internet, but only if Microsoft ignores its basic instincts.

Microsoft Corp's unsolicited offer of some $44.6 billion for Yahoo Inc would create a larger second player to Google Inc's dominance of Web search and put nearly 600 million unique monthly visitors from around the world under one roof.

But the success of a merger would depend on letting some of Yahoo's brands survive and even acknowledging that a few of its products are superior to Microsoft's, ad executives and experts said on Friday.

"They've got to resist their own impulses, which would be to roll the Microsoft product with the Yahoo product and bundle it all in Windows Mobile," said Daniel Taylor, senior analyst at research firm Yankee Group. "It might mean making some hard decisions about whether Yahoo's search product is better."

To be sure, Yahoo has yet to show signs of accepting the offer. Major concerns remain over whether Microsoft could keep Yahoo staff on board while integrating two very different corporate cultures and combining separate e-mail, messaging and advertising platforms.

But advertisers will like the deal because they want more consolidation in the estimated $40 billion Internet market and hope to see a strong alternative to Google.

"They don't like one-player markets because they lose complete control. They don't like markets with lots and lots of competitors either," said Rishad Tobaccowala, chief executive of the Denuo Group, a consulting arm of Publicis Groupe SA.

"The agency structure and marketer structure is that they are only used to dealing with 8 or 9 people in a particular category. Otherwise they don't know how to do it," he said.

In addition, smaller rivals such as Time Warner Inc's AOL or News Corp's Fox Interactive Media could enjoy the breathing room for niche players created in the wake of an intensified Microsoft-Google clash.

"One of the unintended consequences is you suddenly have one fewer player at the table," said Peter Horan, CEO of the media and advertising unit at IAC/InterActiveCorp. "This could have the effect of opening up a little opportunity for other players. It may help AOL.

"Over time, you'll start to see more sophisticated media plans. Advertisers will say: 'I'm buying a lot of reach and bulk off the big ad networks, now I want to add color and flavor by adding the Washingtonpost.com or Ticketmaster or the New York Times'."

Crack in Google's armour

The timing of the offer comes as some investors begin to question Google's power. The company reported disappointing quarterly results on Thursday and analysts said its ability to easily take market share from competitors could be waning.

When it comes to the future of advertising, the market for mobile Internet is still up for grabs. Social networks are also a closely watched category and Microsoft already has a partnership with fast-growing site Facebook.

Google hinted more than once on Thursday that it had yet to get a firm grip on making money from social networks, despite a partnership with News Corp.'s MySpace.

"Some of the things we were working out in the fourth quarter didn't pan out," Google co-founder Sergey Brin said. "But it's a big opportunity because it's so much inventory."

Looking ahead, Microsoft and Yahoo's operations are complementary when it comes to their reach overseas, as well as Yahoo's entry into online advertising exchanges with its purchase of Right Media last year, according to Tobaccowala.

Microsoft's MSN portal is strong in western Europe whereas Yahoo has a foothold in China, including a stake in Alibaba.com.

Yahoo's network of sites on every topic from finance to news and travel, as well as ad sales deals with major newspaper sites, also open up much vast ad inventory for Microsoft.

"Microsoft is in big trouble (in online use) ... the only thing they have proven is they cannot build a large audience," said Bob Davis, managing general partner at venture firm Highland Capital. "Yahoo at least gives them some footprint."

That audience reach should work well with Microsoft's aQuantive, which helps serve and track advertising online.

The danger is that Microsoft goes too far in co-opting all of Yahoo's properties and possibly regretting paying a high price for a company that some view as drooping with fatigue.

"The only brand that will survive is Yahoo Answers and that they will call Live Answers. The rest, nobody needs," said Trip Chowdhry of Global Equities Research. "You are eliminating a loose cannon."