Microsoft and Yahoo to agree tie-up at last?

Microsoft and Yahoo may finally have agreed an alliance - but it seems less ambitious than many hoped.

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Last Updated: 31 Aug 2010

Reports suggest that Microsoft and Yahoo will finally announce an online search and advertising relationship today, after what seems like years of unconsummated flirting. Supposedly Yahoo will use Microsoft’s nifty new technology to power its searches and provide appropriate contextual ads, while it will look after the ad sales and customer service – and they’ll split the revenue between them. Joining forces to take on Google has always seemed like a sensible strategy, but in the context of some of their earlier negotiations, this is a fairly modest arrangement. If they’re going to have any success in eating into Google’s online dominance, they might need to go a lot further than this...

As far as Yahoo’s investors are concerned, it all might seem a bit underwhelming. Since Yahoo boss Jerry Yang rejected a $47.5m takeover approach from Microsoft last year, arguing that it under-valued the company, the company’s share price has dived. Shareholders – led by activist investor Carl Icahn – forced out Yang, and pushed his replacement Carol Bartz to return to the negotiating table. However, as recently as last week, rumour had it that any alliance would need to involve a big up-front payment from Microsoft – while Bartz herself said that she’d only join forces with the Seattle-based software giant in exchange for ‘boatloads of money’. But there will apparently be no such payment involved in the deal to be announced today.

Nor do we imagine that Google will be quaking in its boots. Microsoft has been spending a fortune on developing its new search engine, Bing, but it still only does about 3% of all the internet searches carried out worldwide. Even with Yahoo’s searches thrown in, the combined entity will only account for about 11% - whereas Google’s market share is a gigantic 67%. And the latter’s dominance is now so entrenched that it’s very difficult to see any other technology supplanting it, however good it is. (It also makes it seem rather ridiculous that any Microsoft/ Yahoo tie-up could be blocked by anti-trust regulators, because they’re the second and third biggest players.)

Joining forces will certainly give both Microsoft and Yahoo a bigger toe-hold in the market. But we’re unconvinced that either of them really has much hope of challenging Google online with this kind of limited alliance. We’ll have to wait and see how Icahn and co react, but we wouldn’t be surprised if they’re pushing for this deal to be a starting point rather than an end in itself – a kind of trial co-habitation before a fully-fledged marriage...


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