The Four-Way Judo for the Dominance of Advertising

Microsoft’s bid for Yahoo turned hostile, which spiced up the game-playing among the four major players in the online advertising space: the named two plus Google and AOL. Yahoo, as the party being acquired, can’t comment much, but the other three recently couldn’t help but trading jabs at each other. Google’s objection to the deal has been widely known and Microsoft knows that it can’t befriend with Google in any circumstances. But recent rumor between Yahoo and AOL about potential collaboration opportunities appeared hitting Microsoft’s nerves. During a speech at the IAB conference Ecosystem 2.0 on Monday, Brian McAndrews, former aQuantive CEO and currently senior vice president of Microsoft’s advertising unit, made a bold prediction that over the long term, the only two viable players in the online advertising space are Google and Microsoft. AOL people in the audience were apparently irritated by such a comment. So on Tuesday when it was AOL chief executive Randy Falco’s turn to give a speech, Mr. Falco fired back by saying: “Microsoft and Google can ignore us and leave us off the charts, but they will do it at their own peril.”

Things are getting more and more interesting in this four-way fight to command supremacy in the online advertising market, which Parks Associates estimated to grow to $35.5 billion by 2012. Search advertising is one of the pillars of this fast growing industry and also the focus of the Microsoft’s acquisition of Yahoo. But the four players apparently are jolting with one another for advertising opportunities beyond search. Google has extended its tentacles from online display ads to offline radio and TV ads. Most recently it announced video ads through its adword search program where keyword search can end up with featured videos made by advertisers, who will bid each other for positions at the top page. Yahoo hasn’t lost its focus in spite of the merger talk and the potentially nasty proxy fight with Microsoft. It has already built a partnership with major newspaper publishers to help them sell ads. At the Ecosystem 2.0 conference, Jerry Yang also unveiled Yahoo’s new Apex platform that promised to allow marketers to buy display, search, video, or mobile advertising in a convenient one-stop fashion. These four platforms combined will generate almost $29 billion in ad revenue by 2012, according to Parks Associates’ projection (analysis and projection of online video and mobile advertising industry is featured in Parks’ recently published study New Advertising Platforms and Technologies). By coincidence, AOL’s own one-stop ad platform is called “Platform A” (We quibbed at Parks that if AOL merged with Yahoo, integration would at least be easier for naming the new ad platform). As Mr. Falco put it, AOL is unlikely to compete with Google or Microsoft/Yahoo on search advertising, but in other areas, AOL boasts assets that are not inferior to any of the other three competitors’.

A year ago, all four players were in a frenzy in acquiring technologies, ad networks and other ad-related capabilities that complement their own portfolio. In 2008, they strive to make themselves more relevant to a booming online ad market and a potentially bigger and more lucrative offline world where ad delivery increasingly starts to benchmark what online world has been able to show to the advertisers. Microsoft’s Yahoo purchase attempt is only the start of a much bigger trend. Therefore if the deal is valued based on Yahoo’s search business and current portfolio, $31 per share appears to be justified. But if accounting for combined Yahoo-Microsoft influence for the entire ad industry (not just online) in the future, Microsoft might have to cough up a few more bucks per share to satisfy Yahoo’s board and its shareholders, in our view.

What about Google and AOL? Time will tell.

Disclosure: The analyst owns shares of Time Warner, Inc, parent company of AOL.