Media: All about ... Microsoft's Yahoo! bid

than the other.

In recent times, we've pretty much managed to come to terms with the
fact that Yahoo!, which has rejected the offer, was on the back foot.
After all, its results haven't been a cause for celebration. At the
start of February, on the back of a results announcement showing its
fourth- quarter profits had fallen by 24 per cent year on year to
$205 million, the company announced it was shedding 1,000 jobs,
around 7 per cent of the workforce.

Microsoft is another matter. After all, this is the company that was
easily vilified as a greedy monopolist, one that had the whole IT sector
in a pernicious half Nelson. And, yes, everyone has been aware of the
desperate attempts it has been making to reposition itself as a vigorous
presence on the internet, rather than as a peddler of infrastructure
software - but its bid for Yahoo! has served merely to remind everyone
just how far off the pace it remains.

And the weakness of its position can only have been compounded by the
fact that, a short time after Microsoft made its hostile move, Google's
chief executive, Eric Schmidt, apparently told Yahoo! management that
Google was prepared to act as a white knight in blocking the bid.

In comparable situations in other industries, such an approach would
appear to be surreal or almost obscene. In this case, reports suggested
that Yahoo!'s bosses were actively considering the offer. What price for
a genuine challenge to Google if it can position itself as both the
market leader and the good guy?

1. Yahoo!, which was incorporated in 1995, was, for almost five years,
the pre-eminent search engine on the internet. Then up popped Google and
began its inexorable rise. Google offered a quantum leap in quality
(Yahoo!'s system never quite gave you what you'd been hoping for), and
its user numbers grew astronomically, despite the fact it had been given
minimal promotional backing. Its virtues spread by word-of-mouth and, as
with many life-changing products, its brand name entered the English
language as a generic term. That sort of phenomenon is extremely rare in
any field - and Yahoo! was, quite understandably, left dazed in its
wake.

But Yahoo! does a number of things that Google has never even attempted
to do - namely provide editorial content on its sites and to act more
like an old-fashioned media owner, by selling brand advertising (banners
and skyscrapers and, increasingly, video ads) against a global audience
in excess of 400 million. Some analysts have always believed that as the
focus of growth switched away from search - as it is starting to do -
Yahoo! would be well placed in the next phase of the market's
evolution.

And Yahoo! has been investing in digital ad sales houses to extend its
scope beyond the sites it owns. In 2007, for instance, it acquired Right
Media for $650 million and BlueLithium for $300
million.

It also stumped up $1.6 billion to acquire the paid-search
operator Overture in 2003. And an upgrade programme, codenamed Panama,
delivered a revamp of its core search product in 2006. The aim was to
make presentation more sophisticated - or, according to cynics, a bit
more like Google.

2. MSN is one of the world's most heavily used portals, and Hotmail is
one of the best-known e-mail platforms. However, Microsoft's purchase on
the advertising market has remained distinctly unimpressive.

Since 2004, it has been investing substantially to gain a more
significant foothold, both in search and display. For instance, it
bought the online ad sales house aQuantive for $6 billion in
August 2007.

3. Yet, if a Microsoft/Yahoo! deal were to materialise, the competition
authorities will not exactly be troubled. According to the market
research organisation ComScore, in December 2007, Google had an
estimated 62.4 per cent share of global search revenues. Yahoo! had 12.8
per cent and Microsoft had 2.9 per cent. The total US search market was
worth $8.6 billion in 2007 (there are no reliable global figures)
out of a total online advertising market of $21 billion. The
search market is expected to double in size to more than $16
billion by 2011.

WHAT IT MEANS FOR ...

ADVERTISERS

- Not a lot, on the face of it. Google will remain the utterly dominant
search player, whatever happens. Longer term, however, it's slightly
worrying that just as the market has begun to contemplate the next phase
of the digital ad market's evolution, two of Google's strongest
potential competitors effectively signal that they're in no position to
compete.

- But the interesting analysis to emerge from the US market is a notion
that, for a number of reasons, not least the online medium's apparent
transparency, advertisers need never worry about the price implications
of consolidation. It's a nice theory, we shall have to see.

YAHOO!

- Many observers would like to see Yahoo! hold its nerve. Yes, results
have been disappointing, but it's still the second-biggest operator in a
big and growing online market.

MICROSOFT

- A sobering confirmation of just how quickly things can change in the
digital domain. A decade ago, many in the digital community were willing
to predict that Microsoft's potential was limitless. At the very least,
it could soon control the whole media universe, from content creation to
redistribution and advertising. In one sense, it's true. This article
took shape courtesy of Microsoft Word, for instance. But in other
senses, it's just never going to happen.