I was really intrigued by David Kirkpatrick’s last story on Microsoft and Yahoo in Fortune Magazine.
His key insight was about search market share creating a more liquid marketplace for advertisers. Search market share drives up the demand for and value of keywords. That’s why Google’s search ad revenue share is even greater than its search query market share.
But there’s one other thing that Microsoft doesn’t mention when it talks about purchasing just “search”: there really is synergy between search ads and display ads, which is where Yahoo gets the majority of its revenues. It’s very hard to measure the value of display ads because they don’t surface when a user does something that shows their immediate intent (e.g. search for a lawnmower) – that’s why they can only charge for eyeballs/impressions while search engines can charge for clicks on keywords.
But everyone knows that those display ads create brand equity or other awareness that search ads ultimately get to monetize. So all the major online vendors (MSFT, Yahoo, GOOG) who happen to have both major display ad networks (Google’s I think was built on Doubleclick) and search engines are planning to track what display ads users look at over time. Then they will be able to correlate that with later search queries and search ad click-throughs. In other words, they are finally going to start attributing more value to the display ads, which have never really been measurable. But Microsoft has a plenty big display ad network so they just want to carve the search business from Yahoo. And Yahoo is under such pressure to do a deal that they’re willing to sacrifice the future synergy of their search and display ad businesses. Without search, they won’t be able to offer advertisers the same measurement capabilities as Microsoft and Google. Their display ad pricing and revenues will suffer as a result.
They have been unable to articulate this synergy, or any other part of their strategy for that matter. It’s ironic, but they probably would be able to leverage that synergy with the Google search deal. They also seem to be turning their internal platform for their properties into an Internet scale Web developer platform. But they can’t even convince their top talent to give them some breathing room. It’s game over.