Global Insight Perspective | |
Significance | A takeover of Yahoo! by Microsoft will completely overhaul the internet search business and will radically alter the status quo in the mobile data market. |
Implications | The tie-up of Microsoft and Yahoo! will create another internet titan capable of rivalling Google, and will inevitably lead to a duopoly in the market. |
Outlook | Although regulators will scrutinise the deal intensively, Global Insight expects it to be approved, albeit with some conditions. |
Microsoft announced on 1 February that it is proposing to acquire all outstanding shares in Yahoo! for US$31 a share in cash or Microsoft stock. The bid would value the internet services company at US$44.6 billion and represents a 62% premium on the share price at the end of 31 January 2008. Steve Ballmer, chief executive officer of Microsoft, stated that "…together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market”.
Microsoft noted three areas in which synergies can be derived from the merger:
- Scale economies—driven by audience critical mass and increased value to advertisers.
- Combined engineering talent, thus driving innovation.
- Operational efficiencies via the elimination of redundant cost overheads.
The "ability to innovate in emerging user experiences such as video and mobile online commerce, social media, and social platforms" is also touted, though this is surely a repetition of the second synergy. Overall, Microsoft expects to achieve US$1 billion in synergies with this move, which will up the competition against Google.
Outlook and Implications
Microsoft's Quest for Mobile Dominance: While the effect of the bid on the internet search and services business is glaringly obvious, its effect on the mobile market is a latent earthquake, destined to send shockwaves across the market. With its Windows Mobile OS system, Microsoft is already one of the dominant players in the smartphone mobile operating system market, slugging it out with Symbian and, to a lesser extent, Linux. But the company has yet to make its mark in the emerging mobile-advertising space. Instead, Google and Yahoo! have been signing deals with operators trying to extend their internet advertising business to the mobile domain. Worryingly for Microsoft, its key rival, Google, is no longer content with the advert space and, in late 2007, unveiled plans to plunge into the mobile operating system market with its Android platform. Importantly, too, by wading into the auctioning of the 700-MHz spectrum in the United States, Google is pushing its open-access agenda, a policy that would ensure that the type of deals Yahoo! brokers with carriers have only a limited effect in shutting out Google’s services and applications. By merging with Yahoo!, Microsoft will leapfrog Google to become the first major player offering an operating system and advertising services in the mobile space. Furthermore, given the increasing likelihood of a more pervasive mobile internet experience, the Microsoft-Yahoo combination could slow Google's runaway success (see World: 28 September 2007: Third Screen: The Mobile Phone as The Emerging Advertising Channel, World: 4 May 2007: Microsoft Boosts Mobile Advertising Capabilities).
Not Just about Mobile: A potential Microsoft–Yahoo! juggernaut will become the first true test of Google’s resilience since the internet search giant broke onto the scene. Independently, Microsoft and Yahoo! have lagged behind, allowing Google to dominate the internet search market. Such is Google’s dominance that Microsoft conceded that the former’s acquisition of DoubleClick could give it more than 80% control of the adverts served up to third-party web sites (see World: 17 April 2007: Rivals Fear Impact of Google's Acquisition of DoubleClick). For its part, Yahoo! has been facing increasing pressure to keep up with rival Google. Despite a slew of deals—and particularly as it pushes forward its mobile services to become the portal, search and advertising partner for a number of carriers—Yahoo! has faced a difficult time matching up to the dominance of Google in the desktop-search and third-party-advertising markets. While revenues grew by 8% in the year to the fourth quarter of 2007, net income fell by 23%. Yahoo! already has a significant presence on desktop internet portals through deals with the likes of AT&T and BT. These agreements would be likely transferred and the range of services integrated with the Windows Live portfolio.
Will Regulators Approve?: Given the size of a potential deal, and its impact on a wide area of the information system market, regulators across the world are bound to demand a closer look. Microsoft wants the deal to be closed by the second half of 2008, and its price premium looks appetising enough to convince Yahoo! shareholders. But for regulators in Europe and the United States, there are wider implications at play. When the U.S. Federal Trade Commission (FTC) cleared Google’s takeover of DoubleClick in December 2007, Google noted that the FTC had drawn a distinction between its core business of selling text-based adverts and DoubleClick's core business of delivering and reporting on display ads. This time, however, that logic can scarcely hold given that there is significant overlap between Microsoft’s and Yahoo!’s businesses—both companies offer internet searches, mail services, internet chats etc. While they will likely argue for the right to provide Google with stronger competition, regulators, urged on by all manner of pressure groups, will be fretting about the likelihood of just two companies (Microsoft–Yahoo! and Google) controlling the entire internet experience. In the long run, and if Yahoo! accepts the offer as expected, Global Insight believes that regulators will cave in to approve the deal, albeit with some conditions.
Yahoo Deals
(see United States: 30 January 2008: Yahoo! Reaches New Deal with AT&T But Q4 Performance Disappoints, United Kingdom: 17 January 2008: T-Mobile, Yahoo! Sign U.K. Mobile Advert Deal, Asia-Pacific: 13 November 2007: Yahoo! Expands Mobile Search in Alliance with Nine Asian Carriers, World: 2 October 2007: Telefónica Selects Yahoo! For Mobile Web-Search Services, Asia-Pacific: 20 June 2007: Yahoo! in Alliance with 6 Asian Carriers for Mobile Search Service, World: 16 April 2007: Vodafone In Talks For Pan-European Advertising Deal, United States: 29 March 2007: Virgin Mobile Brokers Services Deal with Yahoo!, and World: 9 January 2007: Yahoo! Searches for Mobile Winners).
Google Deals
(see World: 6 November 2007: Google Unveils "Software-Based" Mobile Phone Strategy, World: 1 October 2007: Google Acquires Mobile Social Networking Company Zingku, United States: 27 July 2007: Google Named as Applications Partner for Sprint WiMAX Network, World: 16 July 2007: Google Launches Mobile AdSenseand South Korea: 5 June 2007: SK Telecom to Launch Google Mobile Search Advertising in 2007).