SAN FRANCISCO - A merger of Yahoo Inc. and Microsoft Corp., as proposed yesterday, creates a much stronger competitor for online ad behemoth Google Inc., but a combined entity would still face an uphill battle, which speaks to Google's dominance of the Internet ad business.
The competitive strength of any Yahoo-Microsoft tandem would rest on each company's respective, and recently overhauled, Internet ad-serving platforms.
But combining two systems considered inferior to Google's won't likely add up to a world beater, analysts said.
It's widely held that while both Yahoo and Microsoft have won more advertising business since their ad-serving platform upgrades, Google's AdSense and Ad-Words features for placing ads on relevant Web pages and Google search results are still considered state of the art, and one reason for Google's dominance of the online advertising business.
Meanwhile, any integration of the two different ad platforms would "pose challenges" that could help delay or even derail any potential strengths from any merger between Yahoo and Microsoft, said Standard & Poor's Equity Research analyst Jim Yin.
The new entity also has to change the world's "overwhelming preference" for Google's search engine, which is no easy task.
Google's search engine routinely hosts a majority of the searches by Internet users living in the United States and other major nations, Citigroup analyst Brent Thill said.
Google sold US$16.4-billion in ads in 2007, or more than 40% of worldwide online ad sales, while combined, Yahoo and Microsoft's market share is less than 25%.
Also, any competitive gains from a Microsoft-Yahoo tandem could be a long time coming, particularly given it's likely any deal wouldn't close until next year sometime, which would give Google more time to prepare any counter-offensives.
For its part, Microsoft executives said on a conference call yesterday that it has identified US$1-billion in synergies in areas of online advertising yield, capital expenditures, and research and development.
But Wall Street also conceded that the newly merged entity could make for a much more formidable challenge, largely given Yahoo's strength in serving up display ads on Web pages, which is a weak spot for Google, which dominates search ads.
Yet even here, the positives may be fleeting. For its part, Google has purchased display-ad network DoubleClick as a means of gaining more display-ad business.
"This gives Microsoft and Yahoo a leg up on display advertising. But it's just a matter of time before Google gets that DoubleClick machine going," said Chad Stoller, director of emerging platforms for Organic Inc., a digital marketing firm owned by Omnicom Group Inc.
Dow Jones