Much to Yahoo about?

Steve Ballmer, Microsoft's CEO, telling an audience at Stanford University that his company is willing to take greater risks in the online search market

IT CAME as no surprise to anyone when, in the middle of last week, Microsoft announced a 10-year deal that will give the software giant full access to the Yahoo! search engine, to be used in conjunction with its own, recently-launched Bing search engine.

Microsoft has made little secret of its desire to join forces with Yahoo!, with both parties having pursued merger negotiations in 2005, 2006 and 2007. Much to-ing and fro-ing followed last year when an unsolicited takeover bid by Microsoft, for $44.6 billion in cash and stock, was rejected by Yahoo! A merger with Google was considered by Yahoo! before it announced that Microsoft had “substantially undervalued” its brand, audience and prospects in its offer. The following month, two pension companies, which held substantial stakes in the business, sued the company and its board of directors, claiming it was in breach of its duty to shareholders in opposing Microsoft’s takeover, preferring instead to pursue “value destructive” deals with other parties. Only a month after that, Google’s CEO, Eric Schmidt declared his concern over any such merger, saying it could compromise the openness of the internet.

He didn’t get his wish. And neither, initially, did Yahoo! Its share price tumbled more than 10% on news of the deal last week, to around $15.14 a share, or 60% lower than what Microsoft had put on the table just over a year previously. However, Microsoft and Yahoo! do now have a search engine that could seriously challenge the dominance of Google.

This is all meat and potatoes for business reporting, but the real question is what sort of impact will it have on businesses looking to market themselves through the internet? In truth, the deal could have a huge impact on search engine optimisation (SEO). ComScore has reported that Google commanded an impressive 65% share of the search engine market share in June, while Yahoo! and Bing held 19.6% and 8.4% respectively. If all of the current Yahoo! users were to continue using Yahoo! via Bing, their combined share would reach 28%, which could really begin to challenge Google’s future dominance.

So what does this mean for a business’ SEO? It could mean a number of possible things. If a company website currently ranks well in Yahoo! but not in Bing or Google, it could really be in trouble of not ranking at all. Alternatively, a website at the top of Bing and Google but not for Yahoo! could see a considerable increase in traffic, as Yahoo! users will now see their site via Bing’s engine instead.

Pay Per Click advertising could also see a major change. Either Yahoo! Search Marketing will be replaced by Microsoft adCenter, or the two will merge. This could affect the Cost Per Click and positioning for many of the sponsored links found when a search query is made.

In recent years, Google has been criticised for its strict rules and terms and conditions, as well as its somewhat monopolistic nature towards the World Wide Web. This is fairly understandable, given that two-thirds of all internet searches are run through it. However, the Ying/Bahoo! engine could encourage Google to relax or change some of its policies and prices, especially if the combined alternative becomes popular enough to claw away some of Google’s dominant market share. This could have a radical effect on AdWords, AdSense and other Google services in the way that they’re operated and managed – perhaps a potential sigh of relief to many search engine marketers. In short, it will become more of a buyer’s market, democratising online marketing costs in the process.

So it is highly possible that change is on the way, with this new partnership providing a possible indication of things to come in the online business world. Already, Steve Ballmer, Microsoft’s CEO, has suggested that his company is prepared to take more risks in grabbing a share of the search engine market. He told an audience at Stanford University in May: “There are some things we have an opportunity to do precisely because we are not the market leader. We can experiment with new business models. We have less to lose than the market leader does.We’ll try some new products that are going to be a disaster.”

In the meantime, some analysts remain skeptical about the viability of the tie-in. They point to a number of previous big technology mergers as evidence that the big players often have difficulty living with one another. When AOL mergers with Time Warner in 2000, they had a combined market value of $300bn. The dot.com crash wiped a third off that and, these days, after it spun off AOL in May this year, Time Warner and Time Warner Cable’s market cap is just over $40bn.

Similarly, News Corporation bought MySpace just before its users deserted in droves (mostly to Facebook), and cynical analysts say it remains in profit only because Google, which is said to be losing money on the deal, pays News Corp for the right to sell search-related advertising on the site. eBay and Skype went wrong because the idea – of buyers and sellers talking to one another via Skype – was a non-starter (eBay, its share price having halved since the 2005 tie-in, is now looking to offload Skype in early 2010). Meanwhile, YouTube has caused plenty of trouble for parent company Google, having become embroiled in copyright lawsuits, and it is expected to lose around $170m this year. However, it is well positioned to take advantage of the explosion in streamed content viewing.

What such sharp rises and disastrous falls show us is that even the best ideas that are making the most amount of money can fail – and usually because of fickle customer taste. Anyone who believes that Google will remain the king of the search engine forever will be hugely unprepared if Bing and Yahoo! meet or even overtake its share of the market. Of course this might not happen at all, but who wants to take the risk?

- A version of this originally appeared on the Liberty Marketing blog.

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