Microsoft and Yahoo – A Brief Analysis
According to comScore Inc., a provider of internet and digital media measurements, the total number of U.S. search inquiries in December 2007 was 9.6 billion, up 15% from the prior year. Google had a 58% market share (up from 52% a year ago). Microsoft had a 10% share (with no change from the prior year). Yahoo, however, had a 23% market share, and is experiencing a decrease in share, down from 28% in the same period a year ago. In other words, not only is the number of searches growing, but Google has gained market share at the same time.
Based on each company’s most recent quarterly filings with the Securities and Exchange Commission, Google revenues grew 59% (all from advertising) with a 31% operating income margin. Microsoft revenues for their online services (search and advertising) grew 31%, but experienced an operating loss at -33% (note that Microsoft’s overall margins improved from 34% to 41% in 2007 on the strength of their software services). Yahoo advertising revenues grew 19% with an operating income margin rate of 9.8% (down from 13.4% from the prior period).
Each of these companies is acutely aware of the competition, what each other are doing strategically, and the potential consequences.
- Google says: “We face formidable competition in every aspect of our business, and particularly from other companies that seek to connect people with information on the web and provide them with relevant advertising. Currently, we consider our primary competitors to be Microsoft Corporation and Yahoo! Inc. Microsoft has developed features that make web search a more integrated part of its Windows operating system and other desktop software products.” Google, however, is developing a free, web-based application for office applications (word processing, spreadsheets, and presentations), currently in beta, called Google Docs. Click here to see their video of the product.
- Microsoft says: The “acquisition of aQuantive, Inc., a digital marketing business will play a key role in the future development of our advertising business. aQuantive earns revenue from online advertising and from digital marketing and advertising agency services. We believe the acquisition will help us build and support next-generation advertiser and publisher solutions in environments such as cross-media planning, video-on-demand, and internet protocol television.” Microsoft adds, however: “Another development is the software-as-a-service business model, under which companies provide applications, data, and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and enabled the rapid growth of some of our competitors. We are devoting significant resources toward developing our own competing software plus services strategies.”
- Yahoo says: “We face significant competition from companies, principally Google, Microsoft and AOL, that have aggregated a variety of Internet products, services and content in a manner similar to Yahoo!. Google’s Internet search service directly competes with us for affiliate and advertiser arrangements, both of which are key to our business and operating results. Additionally, Google offers many other services that directly compete with our services, including a consumer e-mail service, desktop search, local search, instant messaging, photos, maps, mobile applications, shopping services and advertising solutions. Microsoft has introduced its own Internet search service with paid search, and other advertising solutions, and may release features that may make Internet searching capabilities a more integrated part of its Windows operating system.”
In summary, Google is strong and getting stronger. Microsoft is strong but threatened in their software markets while struggling in search. And Yahoo may be weakening competitively, but does have considerable assets and strengths (news, information, search and an advertising network). This offer by Microsoft is really about the continued evolution and development of Internet technology, both search and software applications. It is now demonstrated that the full development, maturation, and use of new technologies into mass markets takes 25 years (used to be 50 to 60 years). Given that the internet (browser) as we know it started in the mid-1990s, we are still very early in the full development of the Internet technology. It is still the wild, wild web. The three big players are clearly jockeying for competitive position and are working hard to create new innovations. Consumers and businesses will be the winners.
Here is a good video summarizing key considerations in a potential merger. While Yahoo is apparently going to turn down the offer, it’s not over with yet. Stay tuned.
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