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What Would Microsoft-Yahoo Mean for Domainers?

The acquisition could mean a lot. Or maybe not.

I had a conversation with myself this morning about Microsoft’s (MSFT) proposed buyout of Yahoo (YHOO). It went something like this:

Me: So, Andrew, what do you think this deal will mean for domainers?

Myself: Tough call. From a search perspective, this is #3 taking over #2. It will be interesting to see how they merge the two company’s pay-per-click platforms.

Me: Yeah, both platforms lag Google Adwords. Yahoo’s Panama platform has been a failure, but it has some stat and tracking features you won’t find in Microsoft AdCenter.

Myself: Hopefully they combine the best of both worlds. From an advertiser’s perspective, there will only be two platforms to worry about rather than three. Microsoft has been a blessing, though: it’s clicks are cheap and convert much better than Google and Yahoo.

Me: In theory, bid prices could go up as there isn’t much choice in tier-1 pay-per-click.

Myself: That would be good for domainers on Yahoo’s feed.

Me: But I guess you wouldn’t be able to do Microsoft-to-Yahoo click arbitrage on Parked.com anymore?

Myself: True, but Microsoft polices that pretty well anyway. The real arbitrage opportunity on Parked is from Google.

Me: That’s true.

Myself: The first question is how long this deal will take to come together. First, Yahoo has to accept the offer. Second, there will be a big anti-trust battle that will have to clear not only U.S. regulators but the EU.

Me: We’re talking about months, if not next year. Just look at how long it took Google to get approval for DoubleClick. Have they even cleared all of the hurdles yet?

Myself: The scary thing is that parking companies that use a Yahoo feed will now have to negotiate with Microsoft. It means new relationships with a company that has a reputation for being tough negotiators.

Me: But Microsoft is now humble in search. It’s buying Yahoo to compete with Google because it has failed. Microsoft has entered into very aggressive ad contracts to take business away from Google. Perhaps it will offer an even higher revenue share to keep companies on Yahoo’s feed.

Myself: Maybe. I wonder if domain parking companies have change-of-control provisions in their parking contracts. It might be a way for Google to bid for more business.

Me: Bidding and competition is good. But keep in mind that if Microsoft remained separate from Yahoo, Microsoft would eventually push headlong into the domain name parking market. That would introduce a third viable player, which would keep the others honest.

Myself: I’m going to stop thinking about this and go check my parking stats.

Me: Me too.

What do you think?

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  1. Steve M.

    Well, while much will remain up in the air as to what effect/s this will have on our industry/ies, one thing seems certain … Google’s going to scream bloody (anti-trust) murder over this potential marriage.

  2. StareClips.com

    I think this is great news for Google! You take an entrenched company which has been doing search and online advertising for longer than Google (Yahoo) but whom Google surpassed with great ease… combine it with an entrenched company which has NOT been doing search or online advertising longer than Google, and who has failed miserably to come anywhere close… mix them together, and what do you have? A much larger much more entrenched company which would still be #2 in terms of search share (Google would still have nearly twice as much search share as the combined organization) and would still be weak in online advertising (Google would still have nearly five times as much online advertising share as the combined organization)… which would now have $45 billion LESS to use to compete with Google. Microsoft is shooting themselves (and Yahoo) in the foot with this offer. Sometimes merging makes sense to fend off a strong competitor. Other times it makes more sense to maintain different angles of competition and simply form partnerships to fend off a strong competitor. This is one of those cases where partnerships make a whole lot more sense than a merger, especially at a 65% surplus over the shareholder value of Yahoo.

  3. Andrew

    StareClips, it sounds like you think this merger is like “two old ladies helping each other across the street.” Is that accurate?

  4. kakrat

    Both MS and Yahoo are heavy weight in its own. Once merged, they will make other companies with overlapping business extremely difficult to live, these will cover both online service companies like monster, match, rent, etc, and software company like freebsd, open source. So the impact is huge. Not only jobs cut at Yahoo, but also in all these related companies.

    For the domainers, dont forget Yahoo does have a leg in this.

  5. StareClips.com

    @Andrew, haha… well, not exactly. Microsoft is big and powerful, but not at search and not at online advertising. Yahoo is much more powerful at search and online advertising than Microsoft. So, this smells exactly like the Time-Warner/AOL merger. One large company that can’t seem to plant its foot solidly in a new market, so they purchase a big player. In the end, they end up hurting the big player, and end up planting their foot more firmly than they could have managed on their own, but end up with less than what they were trying to acquire.

    If Microsoft buys Yahoo, they are likely going to do the same thing they did with Hotmail. They will likely convert all of Yahoo’s PHP code into ASP (ASPX) code, will switch from FreeBSD servers to Windows servers, and this will take a lot of resources and a lot of time. All of this work, and yet the consumers won’t gain a thing from it. Microsoft will now have a higher share of search and a higher share of online marketing, but the combined will still be number two. People who fell in love with Yahoo will fall out of love with MS-Yahoo, people who are defecting from Hotmail may just switch to Yahoo, still remaining withing Microsoft’s umbrella. So, really, the only usefulness I see here is to keep Microsoft “in the game”… but it isn’t going to really make significant inroads towards winning the game.

    With about $3-$4 billion in profits per year, Microsoft might make back their original investment in about 10-15 years. In the meantime, the combined MS/Yahoo is likely going to have an identity crisis, making even more people defect to the ever-solid Google that just keeps staying the course. In-house, Google runs ASP, Python, PHP, and a host of other systems. Microsoft is notorious for switching their acquisitions to their own framework, which is just a waste of resources.

    So, while the combined MS-Yahoo is running around trying to clean things up and integrate, Google will continue to be innovating and leaving them in the dust. Yahoo is strong enough on its own. It’s losing share, yes… not not necessarily because they are weak, but because Google is so strong. This merger isn’t going to make Google any less strong, and Microsoft and Yahoo are stronger separately than they will be combined. A partnership makes a lot more sense than a merger or buyout.

  6. Johnny B. Good

    StareClips, you are right – it smells of AOL/Time-Warner. I remember feeling the same way I do now back when they merged – I knew it would not work.

    My first thought was AOL/Time-Warner when I first heard about the possible new MicroHoo.

    The whole thing makes me sick.

    Yahoo just has not found their “Steve Jobs” yet.

  7. Insider

    The combined MSFT/YHOO beast will still only have 33% of US search share. Google has 58% so this merely levels the playing field somewhat between the 2 entities — which is good for domainers because GOOGlE was actually lowering revshares prior to this. They won’t be able to continue that.

    I think this is a good deal for any 3rd party publisher (domainer, arb-player) at Yahoo! because it reafirms the value proposition in what they do. Analysts have commented that 33% (yes, one third) of Yahoo’s revenues/traffic come from third party syndication like domainers, arbitrage players, browser search plugins etc. and the remaining 66% of revenues is in much more vulnerable display advertising, subject to erosion by other comers like Google-Doubleclick. So when you think about it, Microsoft has just bought one of the largest redistribution companies in the world. If I were domain traffic redistribution shop I’d feel pretty good about the value proposition of my platform right now.

    Granted YHOO has that legacy advertiser base from the Overture acquisition which clearly is a big incentive to do this deal.

    What this is going to do is put Google revenues under significant pressure going forward. Rev shares are going to go much higher to publishers and third-party redistribution houses. That is going to drive further redistribution shake-ups (individual domainers shuffling between ad partners). Google and Yahoo will try harder to skim payments on the backdoor via smart-pricing, TQS and other discard rate like machinations, all while front door revshare payouts increase.

    And this two-party world will probably leave room for a new independent comer to try to enter the fray. Perhaps Ebay or AMZN will buy Sendori or MIVA, creating their own platform for buying publisher traffic cheaper. Perhaps ASK will pull the rabbit out of the hat and try to create a viable third marketplace. Perhaps somebody else .. adbrite etc.

    Initially I’d say try to negotiate a deal with Yahoo, and if that fails to be fruitful then turn hard to Google. Goog is going to need all the publisher traffic it can muster to compete in the years ahead whether it knows [acknowledges] it yet or not. There is still complacency at Google so it may be a touch early though.

    In the final analysis, This is good because what Microsoft has said openly is that they are buying eyeballs and a large tranche of the eyeballs at Yahoo are publisher partners ~ and there aren’t that many big ones.

    In fact if Google wasn’t so aloof/arrogant and a little smarter, they would start cherry picking publishers who are on the Yahoo platform. That’s what they did in 2003 to the former admarket (Overture) when they purchased “Applied Semantics” and single handedly carved the heart of Overture’s traffic away; kicking-off their foray into the redistribution biz and forcing Overture to sell itself to Yahoo on diminished terms.

    The entire domain industry (as big as it is) is only worth a few billion and it supplies a full third of the most permanent valuable traffic/eyeballs that Microsoft is paying 44.6BILLION for. In fact when viewed from an eyeball perspective (the only real perspective that matters), Microsoft is paying 14.86 Billion for a redistribution platform and ad market.

    Google is a registrar and could easily absorb/manage a million good domains by buying 20 top tier portfolio companies for 4-6 billion or so, and then roll up CNET and Marchex for another 1.5 bil in order to manage and build out the sites. For that 4-6 billion they’d get 183 Million uniques a month carving out the Yahoo ad network and dramatically changing the value proposition of the Yahoo acquisition.

  8. Steve M.

    @Johnny B: You got me thinking…with Jobs genius-level insights & capabilities, I’ll bet he could use Yahoo to level the search/paid search playing field by taking it to Google.

    And I’m also sad to see this happen; which, given the large stock-price premium MS’s is offering, is likely to happen unless a white knight comes along.

    The employees at Yahoo have got to be in shock, and horrified, at the thought of working for Microsoft…their top people will probably bail if this comes to pass…many of them going to startups hungry for such human assets.

    I’m sure the headhunters are having a field day calling into Yahoo…

  9. Andrew

    Great comments, everyone.

    @Steve, I wouldn’t worry about Yahoo’s employees. Most of the good ones have left already anyway. The headhunters have been prowling around there for some time.

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