Analyst: Microsoft 'frightened' of Google monopoly

Like Coke and Pepsi or McDonald's and Burger King, Microsoft wants to be the other big player in online advertising

As made abundantly clear with Friday's announcement, Microsoft's US$44.6 billion bid for search engine Yahoo was driven by the software giant's desire to stay viable in the online advertising market.

In addition to holding over half of the market for online search, Google has also become the leading choice for advertisers looking to buy paid search ads. And adding to an already successful online ad business with AdWords, the search engine giant also acquired online advertising firm DoubleClick last spring.

With the pressure mounting to remain relevant in the online world -- and to help grow its user base in the process -- analysts have speculated that Microsoft's hand was pretty much forced in the bold takeover bid.

"Microsoft's time to establish its own presence may have run out with Google having built close to a monopoly power in search, which is something they are very frightened about," Matt Rosoff, analyst at Directions on Microsoft, said. "If the world's going online and there's only going to be a handful of companies, Microsoft wants to be in the mix. So, the merger will allow the company to have a much higher percentage of the search market and should help boost Microsoft's advertising revenue."

Rosoff said that the one thing a combined Microsoft-Yahoo online presence will achieve is some more competition for Google -- and eventually lead to two major players in the search engine space.

"The danger was that advertisers were looking at Google's increasing market share and saying, 'let's just buy search ads on Google, because we don't really need to go anywhere else,'" Rosoff said. "What this move does is create two big players again and I think it pretty much guarantees that, as the online advertising market shakes down into two big players, Microsoft is now going to be one of them. Classic market theory usually shows that the market ends up with two majors players, such as Coke and Pepsi or McDonald's and Burger King, so Microsoft wants to be the other big player."

But other analysts don't share Rosoff's optimism for Microsoft's online future. Despite the fact that Yahoo beat Google to the online search punch, the company hasn't been able to turn paid search into a strong business.

And that's something Michael Gartenberg, vice-president and research director at Jupiter Research, said both Microsoft and Yahoo will need to greatly improve upon.

"There's definitely some potential here, but the challenges for Microsoft are going to be huge," Gartenberg said. "On the other side, if I'm Google, I don't see the need to respond yet. While these two companies have to figure out how to work together and integrate with each other, Google can basically sit back and continue their efforts in this area."

Timothy Hickernell, associate senior research analyst with London, Ont.'s Info-Tech Research Group, shared a different opinion on the move. He said that a second major player in the online ad space would be a welcome change for advertisers looking for more choice in paid search.

"At least in North America, having two major players gives more choice and additional channels for advertisers," Hickernell said. "Most of the changes coming from this deal will be seen behind the scenes, with Microsoft consolidating the business end of this and creating the ability to sell advertising across the both properties at once."

Hickernell said the current economic downturn in the US, along with the announcement of major layoffs at Yahoo might have made the timing of the deal all the more beneficial for them.

Microsoft hopes the proposed merger will receive all necessary regulator approvals and that the transaction will be completed by the second half of 2008.

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Rafael Ruffolo

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