Microsoft and Yahoo: Match or Misery?

A week after rumors resurfaced about whether Microsoft will acquire Yahoo, no announcement appears to be imminent. Such a deal would make a ton of strategic sense for the two companies.

Some in the online marketing community have significant reservations about such a deal, however. Many advertisers and marketers are rightfully concerned about a concentration of media control by a very small number of players.

So let’s explore why Microsoft may eventually want to acquire Yahoo and some major challenges it would face (aside from the potential regulatory concerns). We can glean a bit about whether Microsoft will acquire Yahoo from an announcement adCenter advertisers received on April 30. This statement included the following:

We’re writing to notify you that your Microsoft adCenter Terms and Conditions are updated. The changes take effect on April 30, 2007.

Some of the key adjustments to your Terms and Conditions include:

  • Microsoft may use matching criteria other than keyword searches to display your advertisements.

  • Microsoft may display your advertisements on its network of advertising channels operated by the Microsoft network of participating websites and other distribution outlets.

Microsoft no doubt plans targeting methods beyond keywords and display ads across a network. As advertisers, let’s hope Microsoft gives us at least a modicum of control, unlike Yahoo’s all-or-nothing network syndication plan.

Traffic quality dropped as Yahoo expanded its search and contextual network to include domain-parking pages and other less-than-optimal traffic sources. A smart pricing method, combined with control, would also do a lot to preserve equitable pricing across all click sources. This would hold true regardless of a potential Yahoo acquisition.

In a letter to MSN Strategic Account Summit attendees tin Seattle his week, Microsoft reaffirmed its commitment to online advertising. Kevin Johnson, president of Microsoft’s platforms and services division, stated: “We maintain our sharp focus on this industry, and we will continue to invest heavily in innovation and partnerships in this area.” Bill Gates also said he wants more targeted advertising for this platform.

A Yahoo/Microsoft merger would have a greater impact on the display media side of online advertising than on the PPC (define) search segment. However, a convergence of media types is on the horizon, one in which the current PPC search marketing interfaces and XML-driven APIs (define) become the foundation for more ad automation and integrated control. That makes covering this story more important than simply looking at the relative combined strength of the pure-search market.

Marketers are concerned because they perceive a Microsoft-owned Yahoo would mean excessive media concentration. A quick look at either the comScore or Nielsen data on most popular site networks indicates significant media concentration. Economists and regulators worry excessive concentration will allow media (and network) owners to further extend the reach of those controlling media interests.

Were all the media negotiated, a credible case could be made that non-search premium graphical media will still be sold by reps who might feel they have buyers at a greater disadvantage in a merged scenario. However, real-time auction marketplaces for display media increasingly encroach on premium display inventory.

In display media auctions, as in search, advertisers don’t negotiate with sellers for placement and price. Instead, they compete within the marketplace. Therefore, within the search markets (and eventually automated display advertising markets), there’s no specific disadvantage to having one less network, if we can control the bid prices by network partners or opt in or out of syndication.

Yahoo and Microsoft both believe in the power and validity of behaviorally targeted advertising and have opted users into receiving more relevant advertising through profile application. This differs with Google, which currently (pre-DoubleClick) targets advertising based on real-time search and context only.

With the extra search traffic and more behavioral targeting data in a combined Yahoo/Microsoft entity, advertisers might finally take advantage of the extra targeting options available through adCenter. Bid boosts by age, gender, or complex campaign structures that tap the power of geographic and other segmentation methods make more sense with a larger network, where more impressions and clicks are available.

Without a Yahoo deal, Microsoft will have to grow market share, make deals with publishers, or acquire additional publishers. Interestingly, at the summit, Yusuf Mehdi, SVP and chief advertising strategist at Microsoft, said there are more than 80,000 advertisers in the adCenter system and the system’s yield is better than when it was powered by Yahoo Search. That would seem to indicate Microsoft is perfectly positioned to become a network with good yields to share with publishers.

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