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February 2, 2008

Search, Ads, Yahoo and Microsoft

While everyone comments about Microsoft's offer to buy Yahoo, I think it's interesting to look back at the struggle to stop Google's domination in search and PPC ads.

Yahoo Inc. yesterday announced plans to buy Internet advertising firm Overture Services Inc. for $1.63 billion in stock and cash in a move designed to help the online giant exploit the growing market for sponsored search results. (...)

Overture, formerly known as, pioneered the approach of letting advertisers bid for the right to place their links alongside search terms and paying only when users click through to their Web site. Overture, based in Pasadena, Calif., claims 88,000 advertisers and licenses its commercial results to Yahoo, Microsoft's and other Web portals. Google has copied Overture's business model and claims 100,000 advertisers. (...)

Overture sells sponsored search results to other portals besides Yahoo. Microsoft Corp.'s is one of Overture's top customers, and analysts consider it highly unlikely the Redmond, Wash., software giant will want to continue using Overture's ad network once rival Yahoo completes the takeover.
(Washington Post, July 15, 2003)

On Thursday, Microsoft CEO Steve Ballmer said he regretted not spending more on in-house search research and development in the past, but said the company has addressed the oversight and plans to unveil its own search product within the next 12 months.

"Not only do I think Microsoft is capable of building extraordinary search technology, I believe Microsoft is hell-bent on developing that technology in Redmond (Wash.) without a material acquisition," said Rohan. "That is the Microsoft way."
(CNet, March 26, 2004)

Rashtchy estimated that the search industry will reach nearly $7 billion in revenue by 2007, growing at a compounded rate of 35% each year. Those kinds of numbers attract a lot of attention. In 2003, Yahoo!, which was outsourcing its search to Google, wanted in on the action and paid $1.63 billion to buy Overture. Last month Yahoo! dumped Google and now exclusively uses Overture, officially declaring war. Sleeping giant Microsoft, meanwhile, was rumored to have made an unsuccessful stab at acquiring Google, and is now using its nearly infinite resources to improve it own search engine.
(Forbes, April 26, 2004)

Keyword search is the largest component of U.S. online advertising, and Google derives virtually all of its ad revenues from this category. The growth in that segment speaks for itself. Based on data from PricewaterhouseCoopers/IAB Internet Advertising Reports, the overall keyword search category generated $81 million in revenues in 2000, representing only 1% of overall online ad sales. Jump ahead to 2003, and keyword search accounted for $2.5 billion in revenues -- a hefty 35% of the total U.S. online ad-sales pie.
(BusinessWeek, June 11, 2004)

As previously reported, Microsoft's Internet group is developing a pay-per-click ad-bidding system that pairs search results with sponsored text messages from advertisers. Yahoo's Overture Services currently supplies MSN with sponsored search links, which complement MSN-sold "featured sites." (...) With the product, Microsoft will move into the mother lode of a multibillion-dollar ad business dominated by Google and Yahoo. Search-engine marketing is expected to be worth as much as $5 billion this year, and nearly $9 billion annually within four years, according to Jupiter Research. Microsoft's piece of the pie is smaller than the shares enjoyed by market leaders Yahoo and Google, and the software giant is hungry for more. Google fields 35.1 percent of the searches online, followed by Yahoo at 31.8 percent and MSN at 16 percent, according to ComScore QSearch.
(ZDNet, March 16, 2005)

Microsoft is taking on the great Google Money Machine with an inhouse answer to Google Adwords.

Step forward Microsoft adCenter, launched yesterday to pump out all-paid search traffic on MSN and other Microsoft online properties in the US. Microsoft’s adCenter replaces Yahoo!'s Overture as the paid-for search engine on MSN. The only surprise is how long it took Microsoft to make the switcheroo – predicted ever since Yahoo! bought Overture in 2003 – and confirmed this time last year by Microsoft at its annual MSN Strategic Account Summit.
(The Register, May 4, 2006)

The Internet search-advertising wars are getting hotter: Vowing to catch up to industry leader Google, Yahoo Monday will demonstrate an overhauled advertising system that promises to generate higher revenue and enlist more clients.

On May 4, Microsoft unveiled its own search advertising program and said it would invest up to $6 billion in a bid to catch up with Google.

Yet Google still easily dominates paid search ads — those little text ads that appear near search queries. The Internet powerhouse has made several enhancements to its search program as well.

Google says it hasn't heard anything from Yahoo or MSN to make it worry.

"There's been nothing that's announced that makes me want to change what we do," says Richard Holden, director of production management for Google's paid search programs.
(USA Today, May 14, 2006)

Struggling to make a dent in rival Google Inc.'s dominance over online search, Yahoo Inc. reported a quarterly decline in profit Tuesday but managed to match already lowered expectations. (...) During a Tuesday conference call with analysts, Susan Decker, who was promoted to president when Semel was replaced by Yang, acknowledged Yahoo's past failings.

She said the company had been slow to recognize emerging trends in online advertising and that Yahoo's management structure was overly complex, opening the door for more nimble competitors. (...)

Yahoo commanded an 18.3% share of paid-search marketing spending in June, up from May's 17.8%, Rohan said, but June's percentage is still the third lowest at Yahoo since January 2006.

"Google continues to dominate spending with over 75% market share," he wrote. "Panama stabilized Yahoo's market share slide, but has not reversed it."

Rohan said that even with Panama, advertisers see a better return on investment with Google, which boasts higher click-through rates at lower prices. "Yahoo's Panama was modestly successful but only temporarily halted Google's gains in marketshare," he said.
(Hollywood Reporter, July 18, 2007)

Despite the hopes of many and rumors that Yahoo would post "strong" earnings, Q4 2007 results were mixed, and net income was down from a year ago. In addition, CEO Jerry Yang said the company faced "headwinds" in 2008 and offered weak guidance but promised a return to growth in 2009. Investors were unhappy, and stock was down at one point 10 percent in after-hours trading (this morning it has recovered).

Total revenue in Q4 was $1.83 billion, which represented 8 percent growth of the same period a year ago ($1.7 billion). Full year 2007 revenues for Yahoo were $6.97 billion. Simultaneously, Yahoo announced it would be cutting 1,000 jobs.
(Search Engine Land, January 30, 2008)


  1. I thought the same thing. But that's a part of the corporate game.
    What I'm really disappointed about is that instead of trying to compete with Google by being innovative, MS just lazily buys some of the unimaginative competition. I had this hope that consumers could benefit from this level of competition. I suppose I was wrong.

  2. From ComputerWorld:

    << Dana Gardner, an analyst at Interarbor Solutions LLC of Gilford, N.H., said the potential acquisition is a "risky bet" for Microsoft because the two companies have fundamentally different technological heritages. Microsoft is based on its Windows infrastructure, while Yahoo is built on open-source software and open standards and has even led the way in open-source circles on a variety of projects. (...)

    The offer made today "does sort of smack of desperation," Gardner said. "It would have made more sense a few years ago to have done a merger with Yahoo, but this is an unsolicited bid. It really seems Microsoft waited for Yahoo to be on one knee [financially] in what needs to be a friendly acquisition" for it to succeed swiftly. "That's why I think its risky." >>