Would a Microsoft-Yahoo deal out Google Google?

Bid is riddled with pitfalls and benefits, analysts say

As Microsoft tries to take on search company Google for more advertising revenue by offering to acquire Yahoo Inc., a big question remains: Can Microsoft and Yahoo together best Google?

"That's the key question," said Allan Krans, an analyst at Technology Business Research. "I think it puts them in a better position to gain ground on Google, but I think it's far from any guaranteed results."

Microsoft Friday announced an unsolicited US$44.6 billion cash and stock offer to buy Yahoo to create an alternative to the Google juggernaut. Yahoo said it's reviewing the offer and will respond later.

Several analysts interviewed Friday said the deal has more than its share of benefits and pitfalls for both companies. If Microsoft succeeds in acquiring Yahoo, then the two companies' next step should be to "lay out a strategy to drive search," Krans said. "The ultimate goal is to drive online advertising revenue, but to get there you have to have tools and the platform. But then what advertisers really want to see is people clicking on your site."

Herein lies the problem for both Microsoft and Yahoo: More Internet users go to Google for their online searches than either Microsoft's or Yahoo's Web sites. "They haven't been successful at capturing more of that online traffic. They're going to have to turn that around. They're also going to have to attract more advertisers," Krans said.

A benefit of such a deal, however, is that instead of continuing to compete with each other while attempting to catch up with Google, Microsoft and Yahoo could combine their best features and try to gain ground on Google as one, Krans said. "Microsoft is trying to drive the popularity of its Windows and Office tools through their online offerings, while Yahoo has popular e-mail services and strength in its [online user] groups. Once people sign up and participate in those groups, it tends to be a very sticky thing. People don't jump around."

Could such an acquisition help Microsoft catch Google?

"I think it's going to take a long time," Krans said. "At this point, both companies would like to stop the erosion of their market shares and retain their bases because it just keeps flowing over to Google. Either way, it's going to be a long-term strategy. Google has over a 60% share of search in the United States. It will take a while to change that."

Even if it acquires Yahoo, Microsoft has no way of knowing if it can get users to leave Google and do their searches with Microsoft-Yahoo, he said.

"How do you change what millions of consumers do in terms of their search?" he asked. "It's a very difficult proposition to change those user preferences. It's a difficult question to answer, but they're going to have to figure it out if they're going to challenge Google."

Ironically for Microsoft, the situation is similar to the one faced by a multitude of competitors that have tried over the years to take on Microsoft's Office productivity suite in the marketplace, Krans said. Microsoft Office is firmly entrenched and is used by millions, and competitors have yet to make a significant dent in its market position.

"How do you offer an alternative to Microsoft Office?" Krans asked. "They're facing the same type of challenge in facing off with Google. The tables are turned in that respect."

In a telephone conference call with financial analysts this morning, Microsoft said it wants to give users choice and stop Google from unfairly dominating the search marketplace.

Krans found that an interesting argument coming from Microsoft, since others have accused it of dominating operating systems and other software markets for some time. "Once the shoe's on the other foot, it's a different story," he said.

Rob Enderle, an analyst at San Jose-based Enderle Group, said the deal could change the stakes in the online search marketplace. "Microsoft's MSN property and Yahoo's online property together have enough power to provide a nice hedge against where Google is going," Enderle said.

But Google is likely to try to block the deal, first on antitrust grounds much like Microsoft moved against Google against DoubleClick, Enderle said.

"And Google will try to outbid Microsoft," he predicted, "because neither one of these guys wants the other to get this property and so this is likely to be hard fought."

Google spokesman Matt Furman said his company would have no statement about the Microsoft offer. "It would be premature for us to comment at this time," he said.

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