How Microsoft-Yahoo Deal Could Affect Advertising
By Joao-Pierre Ruth
2/11/2008

VERONA

Jay McLeod, owner of Internet marketing firm Migrayn Studios LLC in Waretown, was busy last week fielding questions from clients worried about the possible impact of Microsoft Corp.’s unsolicited bid for Yahoo Inc. Would they have to make more room in their online marketing budgets if Microsoft does absorb the Web portal?

In some instances, says McLeod, ads on Yahoo cost less than half the rate charged by market-leader Google Inc. “Right now, an ad on Google that would cost $1 would cost around 43 cents on Yahoo,” he says.

On the one hand, a merger with Microsoft might give Yahoo the clout to raise some of its rates closer to Google’s. But on the other hand, it could serve to push rates lower. “We don’t know how this is going to play out,” says McLeod, noting that growing competition from Yahoo could lead to lower ad rates, particularly during an economic downturn.

“Google owns about 86 percent of the search market right now,” says McLeod. “Adding the power of Microsoft to Yahoo would be a good thing for the advertiser in the long term.” In a move to protect its turf, Google has raised questions about whether a Microsoft-Yahoo deal would violate U.S. antitrust provisions.

Bill Treloar, owner of Rank Magic, a Web marketing consulting firm in East Hanover, says marketers could find themselves pursued by a combined Microsoft-Yahoo. Right now, says Treloar, “Yahoo has got a really good pay-per-click [advertising] market.”

Pay-per-click advertisers are charged for the number of times users click the links that bring them to the ads. Treloar says Microsoft might leverage that business if it acquires Yahoo. “It is quite possible that pay-per-click costs go up,” he says. “[Advertisers] are probably paying more for the same linking at Google than for Yahoo’s pay-per-click program.”

Microsoft’s $45 billion offer could help the software giant grab a bigger piece of the growing online marketing sector in which its own msn.com portal has been a distant also-ran. Market research firm Forrester Research Inc. in Cambridge, Mass., projects that U.S. spending on online interactive marketing will grow from $18.4 billion in 2007 to $61.3 billion in 2012. Forrester says revenue from search-engine marketing alone will grow from $8 billion to $25.3 billion over the same period (see table).

Gartner Inc., a research firm in Stamford, Conn., says a combined Microsoft-Yahoo would be a strong runner-up to Google for search and online advertising. Gartner says advertising and media companies that now buy and sell search and display advertising on Yahoo and Microsoft sites can expect to see pricing affected.

Gartner says overall prices could come down as the market becomes more competitive.

David Block, CEO of advertising agency Block & DeCorso in Verona, calls it too early to say how a Microsoft-Yahoo deal could reshape the market. Block & DeCorso designs and develops Web sites and online marketing programs for clients. “Even though we are a small player, [the deal] might affect us in the pricing of some of these products and how available they would be to us,” says Block.

He adds that while most of his clients want their ads high up on Google’s pages, a combined Yahoo and Microsoft could shake up the market.

David Cannon, Block & DeCorso’s creative director, says a deal may take at least a year to complete, if it’s completed at all, and marketers who take action now may be presumptuous. “In theory, it will put Yahoo on a more competitive platform with Google,” says Cannon. “The real shakeout won’t come until you see how it affects competitive pricing on ad bidding.”

For now, advertisers will stick to pouring money into ad placements on Google, he says. But that could change if a Yahoo emblazoned with the Microsoft logo arrives on the scene. “An advertiser will use whatever the dominant media is at the given time,” he says. “If [the market] gets split to be 50-50, you have to consider where you are going to put your budget.”