The Redmond giant has sprung to its feet from its long and comfortable slumber.
Much like the browser business before it, Microsoft has realized it had better get into the search advertising business before its too late.
I think we all know who won the browser war. We also know how they did it.
Even with its proposed acquisition of Yahoo!, Microsoft may have already overslept and thus lost this battle.
On the surface this acquisition looks like a grab for a piece of the search advertising business.
However, just below the surface lie its real targets: the Internet audience and their keystrokes.
Both beachheads Microsoft has or has had control of nearly since their inception, keystrokes via the personal computer desktop and the Internet audience via browsers – not from birth but before the web’s infancy ended.
Like their importance to Microsoft’s franchise before, both have an equally and even greater importance going forward. Audience begets keystrokes and vice versa. However, It’s hard to control one if you don’t control the other.
Microsoft’s $44 billion offer to acquire Yahoo and its audience is an admission by Microsoft that if they aren’t able to augment their present audience now with an acquisition the size of Yahoo, they won’t ever be able to stem the audience gains being made by Google and their control of the largest and most valuable part of the internet audience – the search audience.
At this point, Microsoft’s not getting control of Yahoo’s audience is the single greatest risk facing their business – hence their offer price and the need to get the deal done. Maybe not today or tomorrow, but let unabated Microsoft faces continued losses in both audience and keystrokes.
Its not a market position Microsoft is familiar with or comfortable.
Why search is the most valuable audience on the Internet.
There are two types of audiences on the Internet. The old and familiar audience type, which is the one served and supported by display advertising.
Advertisers buy ads to reach an audience based on what content a publisher assembles to attract a particular audience. Ads are then priced and sold based on the desirability advertisers have in reaching that particular audience.
At any one time, a large percentage of the publisher’s audience is inactive – not interested in what the advertiser is selling.
Advertisers still have to pay to reach the publishers entire audience regardless of how many people may or may not be interested in the advertiser’s ads or products. Because display advertising is inefficient i.e., reaches more disinterested audience than audience of potential buyers – it sells for less and thus generates less income for publishers.
The other type of audience available to advertisers on the web is search advertising.
Unlike display advertising, search advertising reaches only an active audience – people who have explicitly requested advertisers information about their products or services – by their clicking on ads.
Search advertisers only incur costs to reach their audience when consumers click on their ads. Thus search advertising is significantly more efficient in delivering advertising messages to the exclusively active segment of the Internet audience – people who are actively searching for information.
By definition, search advertising only delivers advertisements to people actively seeking what the advertiser is advertising and selling. Because of this efficiency in targeting and delivery, search advertisers are able to reach more qualified prospects for less than through traditional media.
In turn, search advertising providers like Google are able to charge advertisers commensurate with the value the advertisers receive from reaching a efficiently targeted and active audience.
By my calculations, Google’s annualized gross revenue from advertising per visitor is roughly twice that of Yahoo’s and nearly four times Microsoft’s (gross advertising revenues divided by web property visits)
At a minimum, a search driven visit is worth at least twice – up to four times more than a non-search driven visit.
This is why Microsoft desperately needs Yahoo’s audience.
Although there are wide discrepancies over what percentage of search each company gets, Google receives between four to twenty times more search traffic than Microsoft and three to five times more search traffic than Yahoo, combined and assuming no market disruption – the two companies would still only generate one fourth to one half the search business of Google.
This acquisition also assumes Yahoo’s ad platform can continue to harvest one half the value Google does whether through Yahoo! or Microsoft’s search product without cultural distraction or interruption from the merger.
Even with their proposed clean room assembly, Microsoft’s acquisition of Yahoo! does not answer how they will make up difference (search volume + gross revenue per visitor).
By doubling their performance (revenue per visit) post merger to meet Google’s present level of performance, a MicroHoo search advertising business gross revenues per visitor would be half of Google’s.
In order for Microsoft to retain Yahoo’s audience, publishers and advertisers- the combined company will also need to produce:
Highly relevant search results for its audience, a functional ad platform for its advertisers, profitable ad distribution for its publishing partners and most importantly: a greater return on its advertisers’ investments.
Without which any new ad platform and search product may grab the attention of a larger audience and gain its keystrokes only to see it lost after they are unable to deliver what the internet audience has already come to expect, find and get from Google.
Of course, this also assumes Microsoft is somehow precluded from using its expanded platform and footprint to reroute ancillary chunks of audience to its new web properties acquired through the proposed acquisition along with their accompanying keystrokes.
In the absence thereof, there may be no stopping Google’s march.