The result of Microsoft’s unsolicited $44.6 billion bid for Yahoo! will come down to nothing more than maximizing short-term value for shareholders. Forget about preserving the underlying principles of the Internet or the vision of both companies. Like a newly appointed Prime Minister hoping to define a legacy for his administration, Jerry Yang, founder and CEO of Yahoo!, finds his vision being sidelined by both Google and Microsoft.

While positioned as a way of countering Google’s dominance in search, the Microsoft/Yahoo alliance has all to do with 1) display advertising 2) social media and 3) communication platforms (email and instant messenger). Display advertising is the second largest online ad format at 33% of total worldwide online advertising. Google currently owns less than 2% of the display market and Microsoft and Yahoo together own nearly 30% of the display market. The growth of video advertising (predicted to account for 11.5% of online advertising by 2010) and behavioral targeting will accelerate the demand for display based advertising. Yahoo and Microsoft also rank No. 1 and 2 in financial news, and No. 2 and No. 1 in instant messaging, according to comScore. In web-based email, Microsoft share would rise from 25 percent to 80 percent (Google Gmail has a 5 percent share).   

In sharp contrast,  Microsoft and Yahoo would have about 16 percent of the worldwide Internet search market ” still far behind Google’s 62 percent share, according to comScore Media Metrix. Google’s dominance in the search space was strengthened by the acquisition of Doubleclick and its search division Performics (which does create a conflict of interest at the heart of Google’s “do no evil” mantra).

Google well aware of its dominance in search is hoping to influence the outcome of the decision by offering Yahoo! an alternative to maximize shareholder value. Enter Option B for Jerry Yang – sell individuals pieces of Yahoo – under the premise that “the sum of the parts are worth more than the whole”. Yahoo Finance, for example, could be sold to a company like the News Corporation at a premium. More interesting and widely covered by the New York Times is the option of outsourcing all search advertising to Google. While it would be a true admission of defeat in the battle for the “minds and hearts of searchers”, the agreement would maximize shareholder value. Citigroup Global Markets analyst Mark Mahaney in a Friday research note estimated that Yahoo could boost its cash flow more than 25% annually by outsourcing all its search advertising to Google.

Yahoo has recently began restructuring its service offering to maximize shareholder value. Yahoo today announced it was to abandon its YMU music subscription service, and will move current subscribers to RealNetworks-MTV’s joint venture, Rhapsody America.

My bet is on Microsoft’s 50-50 cash and stock offer for Yahoo! being accepted. What about the outcome of the acquisition from a regulatory perspective? How about the challenge of integrating both corporate cultures, audiences and offerings? Stay tuned. 

Yahoosoft, Microsoft, Jerry+Yang microhoo webliquid

About Alain Portmann

My job is simple. To inspire staff, clients and consumers.

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