The Wall Street Journal-20080202-Microsoft-s Bid for Yahoo- Online Marketers Could Have More Options

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Microsoft's Bid for Yahoo: Online Marketers Could Have More Options

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Marketers have watched with alarm as Google Inc. has grown even more dominant in the online-advertising business. Now, with Microsoft Corp.'s bid for Yahoo Inc., they finally have something to cheer about.

A stronger rival to Google could create some options for online marketers and reduce the risk of prices increasing, they say. "I think it adds to the competition in the marketplace and can only benefit the consumer and advertisers," says Lisa Cochrane, vice president of integrated marketing at Allstate Insurance Co.

The largest segment of online advertising is paid search, and Google dominates the market. Marketers pay for short text ads that appear next to the results of Internet searches, and prices are determined by auctions. Advertisers bid for individual words or phrases, known as key words, that they want their ads to appear next to, such as "car" or "insurance." If more ads shift to Yahoo and Microsoft, that could reduce demand for advertising on Google, lowering prices overall.

"Some of the amounts paid for key words will come down," says David Jones, chief executive of Euro RSCG Worldwide, an ad agency owned by Paris-based Havas SA.

Paid search accounted for $8.6 billion in U.S. ad spending in 2007, according to eMarketer, a market researcher. The segment is expected to grow 28% this year to $11 billion, it says.

Usually when there is a consolidation in the industry, the danger is that prices will rise. But in this case, Google has such a commanding position that many ad agencies are reluctant to buy search ads on Yahoo or msn.com because of the relatively small number of searches conducted on those sites. Google gets 28% of the market for paid search ads, while Yahoo gets 15.4% and msn.com 6.5%.

London-based Neo@Ogilvy, a digital-ad buyer owned by WPP Group PLC, spent 90% of its search budget last year on Google, according to managing director Richard Wheaton. Yahoo and Microsoft got less than 5% each, he says. Mr. Wheaton expects the deal to bring more ad money to msn.com.

While Google dominates search advertising, that isn't the case in some other forms of online marketing -- and if they combine, Yahoo and Microsoft would have an opportunity to capture the lead in some of those other areas. Spending on display ads is projected to rise 26% this year to $5.9 billion. Other formats are growing faster, including online video and social networking, according to eMarketer.

One downside for advertisers would be that prices for online display ads could rise. That is because unlike with search, the display market isn't dominated by one player. As a result, a merger would mean fewer viable options for advertisers. Advertisers also would be watching to see if Microsoft and Yahoo could quickly integrate their systems. If not, the advertisers may go elsewhere. "The one thing that is really important here is the landscape is changing quickly," says Mark Kingdon, chief executive of Organic Inc., a digital-marketing firm owned by Omnicom Group Inc.

Having another big online-ad provider also could push big national marketers to shift more money into online advertising, at the expense of the media companies that own major television networks.