The Impact of Microsoft's Bid for Yahoo

What a double whammy of news for the search engine world.

First, Google announced after the bell on Thursday that its Q4 2007 earnings missed analyst expectations. Google missed analyst earnings expectations for the quarter by 1 cent per share, with some analysts mentioning that Google would have missed by even more had they not benefitted from an abnormally low tax rate in the quarter. Revenues and earnings are decelerating faster than analysts had anticipated.

Second came the bombshell this morning that Microsoft had made an unsolicited bid for Yahoo in the amount of $44.6 billion dollars, or $31 per share.

In my opinion, Yahoo shareholders and management will eagerly accept this bid. The stock has been treading water lately at best, and they are making no competitive advances against Google. Many have speculated for months and even years that Microsoft would one day buy Yahoo, and now the rumors have come to fruition.

In my opinion, this is the only way that Microsoft would ever have a chance to catch up to Google in the search engine race. Not only that, but they are buying a massive web property in the form of the general Yahoo! site.

In December 2007, there were a total of 9.6 billion searches done at the five major search engines. Google handled a whopping 5.6 billion of those, with Yahoo coming in second with 2.2 billion, and Microsoft a distant third with 940 million searches. Suddenly if this acquisition goes through, Microsoft will control almost 3.2 billion searches, which puts it a lot closer to Yahoo.

I expect that with the increased traffic, Microsoft will invest HEAVILY in improving the Yahoo search product. That is the biggest reason why many people prefer Google over Yahoo - quality of search. If Microsoft really wants to take a shot at Google, they have to invest heavily in improving their search product.

There are many unanswered questions here. Will Microsoft continue to use their Adcenter product and roll that over to current Yahoo Search Marketing users, or will they scrap Adcenter? Will they use their search results for Yahoo searches, or will they scrap their results and use Yahoo's existing results? Will Yahoo want more money? (I doubt this, considering how high the bid is and how Yahoo has been doing as of late in terms of their share price and laying off employees). What will happen to Yahoo! in general? There is a lot more to Yahoo! than just their search engine.

So many questions. So very interesting. Competition is always good, and suddenly Google has some serious competition if this deal goes through.

Filed under: General Market News | Internet Companies