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?"