Since Microsoft made its $44 billion offer for Yahoo! (so far rejected), many industry veterans, including Fred Wilson
and Paul Kedrosky, have proposed ideas for Yahoo! to increase profitability, avoid a take over by Microsoft (which could potentially damage M&A activities) and stay
independent (though without search, I’d call it semi-independent). In this
article, let’s take a look at the other side of the coin and discuss a scenario which would give Microsoft the competition power it needs without
Yahoo!
While Microsoft’s revenues are dispersed into many areas such as home software, enterprise software, entertainment, and Internet advertising, Google’s revenues currently depend solely on online advertising. While this may sound like a weakness, Google is currently well ahead of the competition and the barriers to entry in online ads are pretty high. Microsoft knows that, otherwise they wouldn’t be so ambitious about acquiring Yahoo!
But what Microsoft can do here is to change the rules of the online advertising game by making it more open in general and less profitable for Google. There have been many companies who have claimed to make advertising more open; OpenAds and RightMedia (which is now owned by Yahoo!) are just a couple of them. But what these companies actually did was make the advertising process more transparent. Advertising is still under the control of networks which manage literally everything; publishers, advertisers, parameters, matching algorithms, etc.
However if one can split up this "network atom" and divide it into more efficient parts, things will be very different. See the graph below:
In an open advertising model, the inventory silo, placement silo, and parameter silo are controlled by many different organizations, which can interact with each other and create advertising mashups. Today Google provides these silos under the following services:
- Inventory Silo: AdWords
- Placement Silo: AdSense
- Parameter Silo: PageRank, Google Analytics, Gmail, FeedBurner etc
The most crucial part of the advertising network is the inventory silo. Therefore, in order to make the open advertising model a reality, a company (presumably Microsoft) would have to jumpstart things by opening up its inventory silo - so that others could use that inventory to create new applications for placement, parameters, etc. What would happen is:
- Companies would give away parameters that can be used with the open inventory. In return, they generate revenue when their parameters are used to place ads.
- Publishers would no longer be stuck with "contextually relevant" ads, but could instead use any of these parameters or mash them up for optimal results on their pages.
- New 3rd party companies would emerge and they would make the whole process easier and more efficient for everyone involved.
The graph below summarizes the ecosystem I’ve just described:
With this model, a web page that consists solely of a Flash game is not stuck with Google’s "contextually relevant" option. It can mash up a bunch of parameters, or get help from 3rd parties and choose the best option for itself.
As shown above, this creates a whole new economy for parameter providers. It also opens new doors for 3rd parties for matching inventory with providers, mashing them up, analyzing and finding the best solutions for advertisers and publishers. It would also enable advertisers to make bids by filling out some XML files and allow the best ad to be displayed on particular page in the best way for a particular visitor.
Gain for EveryoneThis model would not only eliminate the dominance of a single network and create a whole new economy for a lot of players, but also it could prevent a possible bust in the Internet industry.
Today’s online advertising is far too linear. Whoever clicks gives the same amount of money to the publisher and the network. That is, under the current model, the click of a person with limited purchase power is worth the same as a click from Bill Gates.
But this unfair model is not sustainable. Because what it does is to shift money from real production to vaporware. The economy can only get better if clicks on ads produce real results. And that can only be established in an open model in which everyone participates, and all parameters are run in a fully competitive and flexible environment.
ConclusionYahoo! is too risky for Microsoft because of the size of the deal and possible inefficiencies. So my advice to Microsoft is to let Yahoo! remain as the online media mogul. Let Google be the search giant. Instead, focus on shaking up the advertising industry by pushing it toward a democratized structure, make it work for everyone, and weaken Google's business model before it takes a bite from your Office and Windows revenues.