What MS+Yahoo means for service providers

If the telecom and Web worlds are merging, then a mega-merger on one side — Microsoft’s proposed $44.6 billion acquisition of Yahoo — surely affects the other. But how?

The Ad Angle

The combination of Microsoft and Yahoo is, above all, about online advertising. Google is the paid search leader (with more than 75 percent market share in 2007, according to eMarketer), with Yahoo and Microsoft chasing from behind. This week, Google reported fourth quarter revenue of $4.83 billion, mostly on ad revenues, up 51 percent from a year ago. Too bad its stock is taking a hit, down from a high of 750 to a shade north of 500 in a few months. The cause: part law of big numbers, part recession worries, part challenges in selling off its ad inventory, particularly social ad inventory (including a deal with MySpace), which nonetheless remains a priority for both Google *and* Microsoft (which is partnered with Facebook). Even as Web/search/social network advertising shakes out, the next big market — mobile ads — is beginning to emerge as well, with all the same players targeting the riches and just as much uncertainty.

The telco take here is obvious: service providers need to figure out how to add advertising their revenue mix, but mastering this volatile market is not going to be easy. For more on the carrier advertising challenge, read our cover package from our current issue, which includes a big-picture overview of the telco ad opportunity plus examinations of IPTV advertising and mobile ad developments.

Portal Partnerships

Google, Microsoft and especially Yahoo have been key content and ad partners for carrier broadband and mobile portals. So combinations and shake-ups in the Web search/portal market absolutely affect those deals.

It’s probably no coincidence then, given Yahoo’s sliding share price, that days before the unsolicited Microsoft offer Yahoo announced a renegotiated portal deal with AT&T. The deal essentially removes broadband “bounty” fees paid to Yahoo by AT&T, replacing those with an ad revenue-sharing arrangement on AT&T Web and mobile sites. The deal means less guaranteed money for Yahoo but could result in greater revenue for the company if Web and in particular mobile advertising takes off on AT&T properties. AT&T will relaunch the att.net portal soon, powered by My Yahoo content and the Yahoo Mail platform, the companies said. Yahoo recently renegotiated a portal deal with Rogers Communications with similar terms.

The AT&T/Yahoo deal demonstrates a shift in the Web/telco power positions, with service providers now in a position able to cut better deals with their portal partners. Yahoo — which has stated a goal of becoming the “start” page for as many users as it can — clearly remains interested in service provider partnerships. Google, on the other hand, is being viewed more warily by carriers due to its wide-ranging mobile device and wireless services ambitions.

(continued on next page)