Steve Ballmer continues to dismiss the idea of acquiring Yahoo–and he’s right to: Doing so would still be a disaster. But if Microsoft wants to be a player in the search business–and its current behaviour suggests that it still does–combining its search operations with Yahoo’s is a must.
Search is a scale game. Microsoft still has less than 10% of the market. It is extremely unlikely, in our opinion, that Microsoft’s share will ever rise sustainably above this without buying share.
With only 10% of the market, Microsoft will never have the volume of queries and bids necessary to place the most relevant ads in front of searchers, drive high-value traffic, and generate high revenue per search. And without the potential to do that, it might as well just shut the business down.
Microsoft could buy AOL, but that would only give it another 4 points of share (and AOL’s share is declining fast). If Microsoft combined with Yahoo, it would have 25%-30% of the market. This still isn’t commanding, but it’s enough to matter. Now that regulators have shown a newfound interest in regulating Google, moreover, Google itself might be forced to stop looking for ways to take share.
Combining forces won’t save Yahoo and Microsoft’s search businesses, but it will help. We understand why Microsoft is still smarting from the way Yahoo jilted it last summer, but it’s time to get over that and restart those search-partnership talks. Or it’s time to just give up on search.
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