Method To The Madness

As the MSFT-YHOO saga continues, it appears that more of the "strategy" is beginning to unfold. As we have discussed in other posts, the various players being talked about (News Corp, Google, Time Warner - AOL) could end up being components of any deal, but that may be secondary to the discussion. What each provides is leverage. In essence, Yahoo! wants a higher bid, but Microsoft does not want to bid against itself. Enter the new players. Without even making a real bid for Yahoo!, they give this appearance, or at least the illusion, of more value, allowing Microsoft to raise the stakes. Given recent developments, I would not be surprised to see Microsoft offer $33-35 a share, allowing everyone to be happy, go home, and avoid any more confusing partnerships - some of which may actually destroy value. The fact still remains that Microsoft needs Yahoo!, and Ballmer needs a win - all toes are too deep in the water already. The additional discussions have also given Jerry Yang the time to realize that his baby has grown up and is probably going off to college in Seattle. Always painful, but part of the process.

As was pointed out by a Bull Bear Trader reader, Google will probably be the winner in all of this. Notice that they really did not offer much, just enough to keep things interesting and honest, and more importantly, messy. I am sure they prefer two weaker search engines as competition, instead of one stronger one, but it may not matter in the end. As mention in the WSJ: "Google handily won the last phase of online competition focused on the small text ads tied to Web searches. Those ads account for roughly 40% of the U.S. online ad market." So successful is the search advertising, that even Yahoo! is farming out tasks to Google's AdSense.

Of interest in the WSJ article is how Google and its competitors are moving to display advertising, such as banner and video ads. Currently, these types of ads only account for about 30% of U.S. advertising dollars on the Internet. As viewers move from TV to the Internet, more advertising is also being placed on video sites, and sites for women's issues. Google dominates search advertising, but display advertising is still being fought over. Google's YouTube purchase, and Yahoo! recently introduced site Shine (see other posts, or http://shine.yahoo.com/), are well positioned. This is where a combined Microsoft, Yahoo!, and potential News Corp. agreement is critical. It could also allow News Corp. the opportunity to further leverage advertising at MySpace, beyond previous agreements with Google. Better opportunities (i.e. better profits) may be available, but integration will be challenging. Previous talks with partners have failed, and as mention, News Corp. may just be a secondary player in the current discussions.

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