Advertisers should speak up on where Yahoo assets should be

The problem of anti-trustness

A merger between the search advertising of Google with the search advertising of Yahoo would be like Avis buying Hertz or AT&T acquiring Verizon or worse still Comcast. Which is why we have always said that it couldn’t happen. We suspect that Yahoo knew all along that this deal was not feasible and entered into it only to send Microsoft packing and give it an excuse to ignore the Microsoft merger approach.

It is impossible to artificially create conditions for competition in some businesses, and there is no such thing as a natural market. Markets do not end up with three 33 per cent market share holders or four with 25 per cent of the market.

Natural market splits can be anything from a dominant player with over 50 per cent, a second player with 25 per cent and a third with 12 per cent and the rest shared between 3 players.

Right now search advertising is still growing, and it is a business that will soon be entered by the mobile giants such as Nokia, as they add the dimension of “where” to a search to create local search on a handset. Yahoo has a strong set of offerings here and good partnerships, which will eventually make it attractive even to risk averse and merger averse Nokia. Which is why the company has to be bought by one of the existing major search portals, to prevent that from happening.

If the current management sell the company to anyone for less than the $33 a share that Microsoft offered the first time around, they will attract class action suits over their behaviour. However they should be able to defend those given the suddenly arrival of the US recession and the fact that it could not foresee Google pulling out of the talks over anti-trust issues (even though we did).

Microsoft has made its first clear and obvious bid in what is now a vicious war of words, which is to say that they do not want any part of Yahoo. The presumption is that the current management would love that $33 deal back on the table. But with its current share value of just $16bn, instead of the $45bn which Microsoft previously bid, there is plenty of room for manoeuvre and the bet thing Balmer could say was “not interested,” to make it clear that we are discussing a different class of deal, at a far lower price.

The price could go far lower before the market begins to pick up, and with internet advertising not actually growing in the US right now, it will be virtually impossible for Yahoo to turn the ship around and convince analysts that it is a more viable vehicle in a recession.

It would be a case of merging two diminishing forces and hoping that will reverse their fortunes, and it might well not work. Does Microsoft want to buy a business even for $20bn, if in two years time the merged MSN and Yahoo are back to being around the same size? That might be danger. Which is why the smart money is on some kind of face saving merger between AOL and Yahoo.

However keeping the current search averting deal and deleting the name Google and replacing the word Microsoft has also been alluded to by Microsoft CEO Steve Balmer.

It is now up to the advertising community to decide just what they want in place to compete with Google. If it is an AOL-Yahoo partnership, then they must say so and let the two company’s management teams know they would support such a move. If it is a search partnership between Yahoo and Microsoft, similarly they need to reach out and give it their seal of approval.

Failure by the community to act would mean that Google gets stronger in an advertising recession, taking bigger and bigger market share, of a slightly shrinking market. By the time the dust had settled, Google would be up against three crippled rivals and totally in control of market pricing.

Sure advertisers can wait and let regulators bring Google to heal in about 5 years, or they can act now, give some up front promises to rivals and make sure there is a strong rival to keep Google honest.

Copyright © 2008, Faultline

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