Microsoft and Yahoo Search

Recent discussions about an acquisition of Yahoo's search business by Microsoft have centered around two synergies that would come from such a deal.

Costs
The first is an obvious one around costs and that the combined search business for Microsoft will spread fixed costs over a greater revenue. For Yahoo, it will be the elimination of all associated fixed/variable costs with their search business.

Revenue
The second is less obvious and questionable at best. It is the assertion that a combined Microsoft/Yahoo search business will have an increase in revenue per click (RPC) as a result of the increased overall search market share. The chart below from Credit Suisse shows their projections of where a combined Microsoft/Yahoo would fall in RPC.


Google today commands close to $0.70 per click from advertisers, while Microsoft is closer to ~$0.30 and Yahoo is at ~$0.35. The analysts predict that the laws of supply and demand will push the RPC numbers up for a Microsoft/Yahoo search as more advertisers gravitate towards properties with higher market share and bid up keywords in auctions.

There is just one problem with this. It is an assumption and not a scientific fact. How can Microsoft be sure that more advertisers will gravitate to the combined search business and bid up words? Advertisers may simply be spending a majority of their current search advertising budget on Google and then spreading the rest across other properties. If that is the case, we will not expect much difference after a combined Microsoft/Yahoo search deal.

The deal could be a sweet one for Yahoo if it happens. It will allow them to unload their search business which has become a huge distraction for their management and will allow them to focus on being the media property that they should be. However, for Microsoft, I am not sure a combined Microsoft/Yahoo search property will give them the competitive weapon they are looking for to stop Google from not only dominating search but leveraging search to encroach on Microsoft's office business. The combined search business will continue to struggle along for Microsoft until there is a clear alternative to Google from a user's perspective. A re-branded and retooled search property may be the only path for Microsoft. Though the real question is why Microsoft wants to compete in search? Is it not a distraction and futile effort? Are they and their shareholders not better served pursuing their core strategy, like building the most kick ass cloud based online operating system running office productivity tools?