Microsoft's Bid for Yahoo Is All About Big-Budget Brand Advertising

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The search wars are over, and Google has won. Despite years of effort, Microsoft and Yahoo together account for just a third of US Internet searches and even less of the $8 billion market for search-related advertising. But the good news for all of Google's rivals is that online advertising is about much more than search. The new battleground is display — the kind of graphics-intensive spots that were left for dead after the Internet bust — and the emerging category of video. And the latest salvo in that war was Microsoft's $45 billion bid for Yahoo.

There are other reasons to buy Yahoo — its wealth of top-notch Web services, for example — but ultimately it comes down to advertising. Web advertising is in the midst of a metamorphosis. As television implodes, marketing chiefs are turning to the Net to create branding initiatives. They know you can't build a brand with little text ads that pop up next to search results. But you can with video and display, especially now that display has moved beyond static banner ads to include Flash animation and sound. Web advertising, which passed $20 billion last year in the US, is expected to surpass $60 billion in four years, and display and video ads will account for more than a third of the total. That means there's an opportunity to make money by dominating those categories the same way Google dominates the search market. "The race is on," says Mark Kingdon, CEO of digital ad agency Organic.

Google is already off and running. In February it rolled out AdSense for Video — an early attempt to bring video advertising to the thousands of sites it now delivers text ads to. What Yahoo brings to the table is numbers: It is the world's most popular Internet publisher, delivering Web pages to nearly 140 million people a month in the US alone. Yahoo also delivers ads to a vast network of independent sites, increasing its advertising reach to 85 percent of US Internet users, according to comScore. Microsoft reaches 56 percent of the US Internet population through MSN and Windows Live, but it still lacks credibility with Madison Avenue. Put it together with Yahoo, however, and you have a scale that even Google can't match.

Even if the Yahoo purchase goes through, a company like Microsoft needs more than reach. It also needs the technology to deliver the right ads to the right eyeballs at the right time and come back with a precise measurement of the results. But as Tim Hanlon of digital consultancy Denuo observes, "The best stuff is not coming from the leviathan players." One of the biggest advances in advertising technology, behavioral targeting, was pioneered by little firms like Tacoda (before it was bought by AOL) and the Drivepm unit of aQuantive (before it was bought by Microsoft). Behavioral targeting tracks surfers as they traverse the Web, making it feasible to deliver automobile ads, say, not just on auto-related homepages but on other sites visited by someone who's shown an interest in buying a car. That has opened up vast new quantities of inventory — Web pages that previously would have been a tough sell to advertisers but now make sense. "There's a lot more innovation to come," Hanlon says. The irony is that it probably won't be delivered by Yahoo, whether or not it's acquired by Microsoft. After all, this is a company that fumbled every opportunity in search. "It's a classic case," Hanlon adds. "Do two wrongs make a right?"

What are Participatory Notes?

There has been talk about 'banning' Participatory Notes after the unexplicable rise in the Indian stock markets in the last few days. What exactly are 'Participatory Notes' or PNs?

The article below in The Hindu Business Line attempts to throw some light on PNs

What are ‘Participatory notes’? D. Sampathkumar Mumbai, Oct. 17

‘Participatory notes’ are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, ‘derivative instruments’.

When the Indian capital market regulator permitted, back in 1992, foreign institutional investors (FIIs) to register and trade in Indian securities, every one assumed that they would make proprietary investments out of their own capital.3rd-party investments. There was no question of their trading on anyone else’s behalf. But as it turned out, FIIs were merely acting as a conduit for third-party investments.

But some of these third-party investors had their own preferences in the matter of what Indian stocks that they would like to own with its own risk and reward characteristics. In order to ring fence, each such pool of investments they created accounts or ‘sub-accounts’ in FII parlance.Sub-account holders. But even sub-account holders, it turned out, were not investing their own money but were in fact raising money from a multitude of high net worth individuals.

They were issued pieces of paper that derived its value from underlying equity instruments of Indian corporates. The participatory notes were now well truly launched. International investments got a little more complicated with sub-account investment institutions raising loan funds as securitised paper, with a pool of underlying equity shares of Indian companies.

All this leveraged money got further leveraged with the investments going into not just equity shares but derivative instruments (futures and options) of shares of Indian corporates.

Thus one could have a sub account holder of a registered FII investing a combination of subscriptions by a group of investors topped up with funds borrowed by floating yet another piece of tradable instrument using a pool of participatory notes as collateral.

But the tale of leveraged investments became a little more complex with a $100 of such funds getting invested, for example, not in Reliance shares but into futures contract on Reliance shares.

Futures contract

Now, in a futures contract, one did not have to invest the full value of the contract. It is enough if put up a small margin and topped it up each depending on how the share price moved.
The potential of $100 got further magnified.

It is easy to see the super structure of heavily leveraged investments flowing into the Indian stock market. That is without even thinking of whatever private financial arrangements that each one of investors in the original pool of investments that gave rise to the participatory notes.Global liquidity.

All of this became possible when there was a global liquidity thanks to the economic policies of the West and more particularly the US. A financial distress for one lender who participated in leveraged transaction of investments of a sub-account holder of an FII who had invested in the Indian stock market can cause him to call back his loan.

This could lead to the sub-account holder closing out his futures position in the underlying share which caused the latter’s future price to fall.

Share prices

Since future prices are in turn linked to the spot prices of the same share, there is a price correction in the spot price as well. The fall in share price erodes not just the overseas investor’s wealth but that of domestic investors as well.

The depreciation of the rupee’s value against other currencies or wiping out huge chunk of the RBI’s currency reserves when the liquidated investments goes out of the country, are the other unintended consequences of the FII play on the Indian stock market.