Devangshu Datta: Search for market share

The choice is now between Google and Microsoft-Yahoo

Internet Business” is no longer an oxymoron, but the descriptor still causes rational dissonance. The logic of cash flow and market share is often obscured by over-emphasis on “eyeballs”. This is a pity. Deals like Microsoft-Yahoo and its ramifications are complicated enough without misdirection.

Over the next five years, Microsoft will pick up some of Yahoo’s operating costs. The MS Bing search engine will power Yahoo searches. MS will also run AdCenter on Yahoo sites, to discover optimal ad pricing. In return, Yahoo will pay Microsoft 12 per cent of revenues generated via advertising and searches on Yahoo-owned/operated sites. Net-net, Yahoo reduces costs and gets extra cash flow.

Yahoo will continue to handle ad sales, customer relations, etc. Bing will be available elsewhere. The Yahoo brand remains. MS’ search contribution is acknowledged. Ad-Search, and classified ad revenues come to 31 per cent of Yahoo’s total revenues for Jan-June 2009. (Display ads, which generated 24 per cent of Yahoo’s FH 2009 revenues, are not in the deal.)

Yahoo holds 20 per cent of US market share in search ads and 8 per cent of the global market. MS holds 3 per cent of global market share and 8-9 per cent of US market share. The consolidated revenues are dwarfed by Google, which controls 67 per cent of the global market. (Google has 92 per cent market share in India with MS+Yahoo holding 7 per cent.)

This is a classic concentrated, monopolistic market. The old truism about media, advertising and related businesses runs: No:1 is very profitable, no:2 survives, and the rest bleed. No:2, Yahoo has seen revenue decline in the last six months. A strategic combine of nos 2+3 may have a better chance due to economies of scale, especially since no:3 has cash on its balance sheet.

Online search and advertising markets are growing quickly and mutating. Steve Ballmer argued at the Cannes Advertising festival that “all traditional content will be digital within 10 years. There won’t be newspapers, magazines and TV programmes. There won’t be personal, social communications offline and separate. In 10 years it will all be online.” More and more, search and advertising is also driven through mobile.

The deal triples visibility for Bing and if AdCenter proves worthy, the combine could create higher revenue per search. For Yahoo, this seems an act of desperation but that doesn’t mean it is a mistake. Yes, it would have been better for Yahoo to have taken the MS buyout offer last year for $47 billion-plus. But it would be a lot worse to die a slow death as Yahoo may otherwise.

Two case histories are inevitably being cited. One is MS’ successful challenge to Netscape in the browser market. The Windows hammerlock on operating systems was a killer-app that destroyed the incumbent standalone browser.

The other case is Yahoo’s allowing a startup called Google to power searches for a three-year period. That was when smart surfers started moving away from Yahoo. Can the Yahoo brand afford another piggyback ride or will brand erosion eventually impact Yahoo’s other revenue streams?

Well, Google’s search engine and Adsense are dominant but the online advertising market is not “moated”. Google doesn’t have leverage comparable to that of Windows in the mid-1990s. Bing has already gained share at Yahoo’s expense and this deal only accelerates the process.

For “aam” surfers, or web business owners, the choices will be binary once the deal is through. Google or Bing as the primary search engine? Adsense or AdCenter? Quality of service, features, value-for-money/time equations and branding are likely to be the important determinants when making those choices. That this happens to be an “internet business” doesn’t alter the fact that it is first and foremost, a business.