The Argument Against Yahoo-Microsoft

When it comes to whether Yahoo (YHOO) should sell its search business to Microsoft (MSFT), our answer has always been yes for three basic reasons:

  • Like Microsoft CEO Steve Ballmer, we believe that combining Yahoo’s bidders with Microsoft bidders for the same search keywords would drive up cost-per-click.
  • Jefferies analyst Youssef Squali says outsourcing search infrastructure to Microsoft could save Yahoo $1 billion to $1.3 billion per year.
  • Finally, ad agencies tell us they don’t care if they buy search and display advertising from the same place.

But this week, a source we can only describe as someone very familiar with Yahoo’s advertising business gave us four reasons why Yahoo should actually run as far as can from Microsoft’s offer.

  • The primary reason is that while most agencies and ad buyers may not care if they buy their search and display advertising from the same place, some do and the number is rapidly growing. Our source estimates that two years ago, probably 30% of Yahoo’s advertisers bought into this convergence, 50% buy it now and next year, 70% will prefer taking their business to a search engine that can also sell display advertising and vice-versa.
  • Even outside of losing the business of advertisers who prefer to do one-stop shopping, giving up search could drastically damage Yahoo’s display business. Our source says about 25% of Yahoo’s display revenues come through behavioural targeting, which doesn’t work if Yahoo doesn’t know what search queries its users are using.
  • If Yahoo were giving up on search in exchange for Microsoft’s display business, Google would be the only major Internet player that sells both forms of advertising. “If Yahoo and Microsoft split the baby, Google that will become much stronger in the display space,” says the source.
  • Selling search would make it more difficult for Yahoo to recruit top engineers and sales people. The convergence of search and display is cutting edge and “the best people in the world want to be on the cutting edge.”

Of course, another way to read our source’s list is as a set of demands Yahoo should make of Microsoft before it commits to any deal.

Specifically, Yahoo must demand it be able to:

  • Feed its display advertising buyers into the search buying process without Microsoft’s help.
  • Gain access to all search activity on both Microsoft and Yahoo search entrances.
  • For good measure, Yahoo should be able to track how users interact with Microsoft’s Web properties — including its ads.

In the end, our source is fairly certain that almost no one at Yahoo actually wants to sell its search business to Microsoft, but that doesn’t mean it won’t happen.

“If you’re going to do the best thing for the marketer that would never, never be allowed, [but] sometimes checkbooks get in the way of making the right decision.”

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