Spoils of Yahoo Deal Would Exceed Ad Revenue

Microsoft's first priority in an unsolicited bid for Yahoo is to be able to compete better with Google for the ad revenue that comes along with Internet searching. But a merger would bring Microsoft a lot of other goodies, too — including e-mail services, photo sharing and social networking.

Google remains the dominant player in the online advertising game, and it's clear what the search-engine giant is about from a visit to its home page, which is nearly blank except for a box awaiting search terms.

In contrast, the Yahoo home page is a full of services, including personal ads, games, jobs and many content areas: technology, cars, finance, food, movies, music ... the list goes on.

There are also popular properties that don't have the Yahoo name, but which are owned by the company. These include the photo-sharing site Flickr and the social-bookmarking site Delicious.

And both Microsoft and Yahoo have extremely popular e-mail services. In fact, Charlene Li, an analyst with Forrester Research, estimates that a Microsoft-Yahoo union would cover about 90 to 95 percent of all e-mail and instant-messaging use.

That's a level of market penetration that has Google chief legal officer David Drummond up in arms. In a note on the company's Web site, he expressed fears that Microsoft and Yahoo might find ways to keep users from gaining access to the instant messaging, e-mail and Web-based services of competitors like Google.

He points out that Microsoft has been accused of anti-competitive practices in the past.

But, Robert Litan, a former Justice Department antitrust official, says the government won't be looking at past behavior in assessing a potential Microsoft acquisition of Yahoo. It will look at what a merger might do to market share.

Litan says any decision involving e-mail or IM will depend on whether officials separate them out from other online services.

"Once you decide the relevant market or define it, a lot of things fall out from that," he says. "You know how concentrated the market is to begin with — or if the merger will make it more concentrated."

Litan says if Justice Department officials see MySpace, Live Journal, LinkedIn or any number of networking sites as part of the a market that includes e-mail and IM, then a Microsoft-Yahoo merger wouldn't seem threatening.

Yusef Medhi, who oversees large-scale mergers at Microsoft, says the future of these services is in such flux that it might be hard at this point to define them as a closed market.

"There is a broad set of services out there that are going to evolve over time," Medhi says, citing e-mail, instant messaging, social networking, text messaging and voice services as examples.

Medhi says Microsoft believes that these services will offer new ways of making money online in the future, especially when their properties are combined with Yahoo's. Li agrees.

"If I bought shoes on Zapos.com, I can tell my girlfriends about it on MySpace or Facebook or put up photos on Flickr or bookmark those things on Delicious," Li says. "Those are new activities that represent marketing opportunities."

Microsoft is still most interested in getting some of that online search advertising revenue away from Google. But all the other properties that it would gain by acquiring Yahoo make the potential deal look even sweeter.

Q&A: Microsoft's Bid for Yahoo

Graphic: Search Engine Market Share in U.S. i i
Alice Kreit, NPR
Graphic: Search Engine Market Share in U.S.
Alice Kreit, NPR

Annual Revenues

A look at the 2007 annual revenues for the two companies involved in the deal and their main rival:

Microsoft Corp.: $51.1 billion*

Google Inc.: $16.6 billion

Yahoo Inc.: $7 billion

*Fiscal year ended June 30, 2007

Source: Company Web sites

Microsoft Corp. has made an unsolicited bid to buy Yahoo Inc. for $44.6 billion. Yahoo has said it will consider the offer, which would unite two companies looking to increase their Internet search traffic and advertising revenues in the shadow of Google Inc.'s dominance.

If approved, the deal would be Microsoft's largest ever. The move raises questions about what's at stake for Yahoo, as well as Microsoft, and what government hurdles may have to be cleared.

What does Microsoft stand to gain in this deal?

Microsoft would be paying a lot of money, $44.6 billion, but the company has been eager to improve its position among search engines and compete with Google, the undisputed leader in online search. A combined Yahoo and Microsoft would have about a third of the U.S. search audience, which would still trail well behind Google's nearly 60 percent, according to data from comScore, which measures the market.

Microsoft also would like to get a bigger share of the online advertising market, which the company estimated at $40 billion last year and expects to grow. Yahoo's themed search areas, like finance and sports, draw the eyes of customers who visit the site for its free e-mail and instant-messaging programs and could offer greater opportunities for advertising. Microsoft also could use its sizable pocketbook and software power to entice more ads to the merged company.

What's in it for Yahoo?

Financial stability. In the last year, Yahoo's finances have deteriorated. Earlier this week, the company announced a 23 percent drop in quarterly profits, then said it would cut some 1,000 jobs — about 7 percent of its workforce. The company has also given a cautious outlook for 2008. For shareholders, Microsoft's offer of $31 per share — 62 percent more than what Yahoo's stock was worth when the market closed Thursday — has to be attractive.

Yahoo also would gain access to Microsoft's extensive computing power and data capacity, which might make it possible to offer software like Microsoft's Office suite over the Internet.

This isn't the first time Microsoft has made an offer. What happened last time?

Microsoft and Yahoo have talked about a possible deal since 2006, and the software giant made a similar offer last year. Former Yahoo CEO Terry Semel rejected that deal, but Semel resigned from Yahoo's board on Thursday. As Microsoft's CEO Steve Ballmer said in a letter sent to Yahoo's board shortly after Semel's departure, "A year has gone by, and the competitive situation has not improved."

Could government regulations stand in the way of a deal?

The Justice Department has said it would be interested in looking into the potential takeover to see if it would violate any antitrust regulations. But the bigger hurdle could be overseas. The European Union, which could play a role in approving the deal, has shown concern about Microsoft's dominance in the software market. In October, Microsoft ended a lengthy legal battle with European regulators in an antitrust case that cost the company millions of dollars in fines.

Are there other possible bidders?

While a surprise bid from another quarter is always possible, any company would find it difficult to compete with Microsoft's vast resources.

Written by Erica Ryan, with reporting by Uri Berliner.

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