What Microsoft wants from Yahoo

Stumps up $44.6 billion to stay in the game with Google

After much speculation last year, Microsoft has officially made a bid for Yahoo, the increasingly beleaguered web giant. Microsoft has offered to pay $44.6 billion (£22.4 billion) to seal the deal.

On the surface, a Microsoft buyout of Yahoo seems like a straightforward anti-Google measure. But that's not the whole story.

Chasing Google

In a letter to the Yahoo board, Microsoft’s Steve Ballmer pointed out that the online market is “increasingly dominated by one player”. And by plugging Yahoo in to the Microsoft machine, Ballmer believes that Microsoft and Yahoo can “offer a credible alternative for consumers, advertisers, and publishers”.

For starters, Yahoo has a greater share of the global search market than Microsoft does. Comscore data for December 2007 gave Google 9.6 billion searches (globally), compared to 2.2 billion searches for Yahoo and 940 million searches for Microsoft.

In the US, this translated to a 58.4 per cent share of search for Google, 22.9 per cent for Yahoo and 9.8 per cent for Microsoft. Add Yahoo and MS together and their combined share gets boosted to 32.7 per cent - certainly better, but still far from a winning position.

While buying Yahoo will give Microsoft an immediate leg-up in the US search market, December 2007 Hitwise data for the UK shows that the impact on search here will be negligible.

The Hitwise data shows that, in the same December 2007 period, 74.78 per cent of all UK searches were made using Google UK. Combine it with Google.com’s slice of the action (14.66 per cent) and Google practically has a 90 per cent stranglehold on the UK search market. Hitwise pegged Microsoft at 4th place in December 2007, with only a 2.05 per cent market share in the UK.

It’s not just about search

In Microsoft’s letter to the Yahoo board, Steve Ballmer suggests that a Microsoft/Yahoo alliance would “create a more effective competitor in the online marketplace” and a “leading global technology company with exceptional display and search advertising capabilities”.

On the other hand, web users who don’t use these two Google alternatives now, probably won’t use one bigger Google alternative later. At least not for search. Or online video for that matter – Google-owned YouTube pretty much has that area sewn up.

But let’s not forget that Microsoft and Yahoo do have an enviable set of online applications between them. As Jupiter Research analyst Ian Fogg points out, Microsoft has the most popular IM client (Live Messenger), its own blogging software (Windows Live Spaces) and millions of Live Mail users.

Yahoo too has a long-established online email service (Yahoo Mail) and it also owns two of the web’s most popular online apps – Flickr and del.icio.us.

In buying Yahoo, Microsoft certainly plugs some small gaps in its product portfolio and gains a whole new bunch of users that it can advertise to. Ultimately, it gives Microsoft a better chance of competing against a dominant Google online. And in the next ten years, that’s where the action is going to be.