With the bid to purchase Yahoo by Microsoft, the war to control the future of advertising to consumers is in full throttle. Clearly a Microsoft-Yahoo combination will change the game in a major way. But this is not the beginning of the contest, nor is it the end. It is a major milestone and turning point in the battle. Surprisingly, most of the pundits and the business press are missing the mark. There is a lot of talk about new monopolies and even Schumpeterian creative destruction. What is at stake is control of the vast amounts of money that is, and will, increasingly be spent by advertisers in the new digital advertising networks and platforms. Since the total spend on advertising tops $400 billion a year, this is a very large prize.
On the face of it, Microsoft is buying market share and will be more competitive with Google in the advertising search business. It is a hefty $44 billion dollar price tag, so this is an enormous wager on Microsoft's ability to transform the combined assets to drive revenue, profitability, and cut costs. It is also an effort to gain a critical position in the emerging world of interactive advertising platforms of the future. The market doesn't see $44 billion dollar acquisitions too often, so it is worth close examination.
The immediate issues are Microsoft's ability to cut the combined entity's investment in technology and other costs. Some have estimated the savings at as much as $1 Billion dollars a year. At a P/E of 17, that translates into $17 billion of value, or almost 40 percent of the transaction's value. If you factor in modest improvements in revenues, and don't forget Microsoft $6 billion dollar acquisition of Adquantive, the value that Microsoft can create should cover the acquisition premium for Yahoo. In addition, Yahoo is the dominant e-mail service provided globally. That is a franchise worth owning.
The interesting aspect of Microsoft's move rests with the longer-term implications for interactive advertising platforms. The gold rush is on, and Microsoft is making an aggressive play to have a secure competitive position to extract value from the billions and billions of dollars that will ultimately be spent by advertisers trying to reach consumers.
As the old world of traditional media atrophies, the billions spent on newspapers, magazines, radio, broadcast and cable television, and other forms of traditional media will face fundamental threats. There is already ample evidence of this, just ask any newspaper publisher. The audience is shifting its habits, but more importantly, so are the advertising dollars.
There is another important shift taking place. In the old world of traditional media consumer audiences were aggregated and sold in bulk. The new digital advertising networks and platforms create a completely new dynamic, namely the ability to target consumers in a seemingly precise way. One of my colleagues describes this as the creation of one huge classified ad marketplace.
The battleground is not simply the Internet advertising marketplace; it will extend to all advertising delivered on digital platforms. This includes cable and satellite set top boxes, mobile phones, game consoles, in addition to all Internet advertising. There are already a number of major players in this arena in addition to Microsoft and Google. There are the media companies, probably led by News Corporation, the advertising agencies, probably led by WPP, the equipment and network manufacturers, probably led by Cisco, the wireline telecom companies, probably led by Verizon, and a number of additional players with important niche positions. In this category, TiVo comes to mind, as does eBay. Navigating this changing competitive landscape will require swift and sure execution.
This is going to be the equivalent of corporate hand-to-hand combat. Over the weekend Google started to talk about anti-trust concerns generated by the Microsoft/Yahoo merger. All this is rather amusing, given Google's current dominant market position. Then again, Microsoft complained about Google's acquisition of DoubleClick. All is fair...
The Yahoo acquisition will trigger strategic responses from a number of competitors. For one, the management at Time Warner must be wondering about where to take AOL from a long-term strategic point of view. All the cable MSOs have to be worried about competing with another broadband "pipe" into the home.
The "game is a foot." The implications aren't limited to "Silicon Valley." It certainly won't be dull to watch.