Internet Marketing News and Press

Yahoo’s board members received a letter last weekend from Microsoft’s fearsome chief executive, Steve Ballmer. In précis it said: accept my $44 billion (£22 billion) takeover offer by the end of the month or prepare to go to war.

The first casualties would be the directors themselves. “If we have not concluded an agreement within the next three weeks, we will take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors,” Ballmer wrote.

Then he threatened to reduce Microsoft’s offer if Yahoo failed to meet the deadline: “That action will have an undesirable impact on the value of your company from our perspective, which will be reflected in the terms of our proposal.”

The one-two punch was typical Ballmer. The Microsoft chief has a reputation for being one of the most aggressive operators in the business world. Type “Ballmer” into Google and you will be directed to infamous footage of Ballmer bouncing around a stage like a gorilla shrieking: “I love this company.” Subtlety is not his suit.

It is more than two months since Microsoft sprang its takeover offer on Yahoo, and relations have soured by the week.

Yahoo was once the hottest name on the internet but years of lacklustre management have erased that lead. Now it’s hot once again, caught in a tug of love between four of the biggest media and tech companies on the planet.

Founder Jerry Yang took back the helm at Yahoo last summer after the departure of veteran media executive Terry Semel. Yang is a tech genius but few thought he had the corporate savvy to shake off Ballmer. Last week he made his most concerted effort to wriggle free by reaching out to Time Warner’s AOL and to Google, Microsoft’s arch enemy.

Not to be outdone, Microsoft hit back with news that it was talking about a joint offer or arrangement with News Corporation, the media group that owns The Sunday Times and MySpace, among other titles and companies.

What was once a straightforward tussle between ailing Yahoo and muscle-bound Microsoft has become a takeover battle swirling with intrigue, rumour and counter-rumour.

Fuelling the increasingly heated battle is the prospect of capturing the flood of advertising dollars moving online. Search engines – led by Google – still dominate the way people access the web and therefore the attentions of advertisers. Not so long ago half a dozen firms competed for those searchers and the ad revenue that followed them. Soon, said Collins Stewart internet analyst Sandeep Aggarwal, “there will be three – Google, Baidu [China’s No 1 search firm] and some combination of Microsoft and Yahoo”.

Yahoo’s board members are weighing up their options after meeting on Friday. Whatever they decide, by the end of the month the internet landscape looks bound to undergo a decisive change. IN 2001 Rafat Ali, publisher of the new media website Paid Content, used four search engines to find something on the web. “I was using Yahoo, AltaVista, Ask Jeeves and Excite and was frustrated with all of them,” he said. Then he switched to Google – and hasn’t looked back.

Seven years later AltaVista and Excite have gone, Ask Jeeves has become Ask. com and been taken over by IAC, the internet conglomerate, and Google has firmly pushed Yahoo into second place. “We are creatures of habit and if something enters the culture in such a deep manner as Google has, yes, the competitors are there, but you are fighting cultural forces that are difficult to change,” said Ali.

He was one of the first to report that Yahoo was considering a deal with AOL. Under the plan being discussed, Time Warner would fold its AOL unit into Yahoo and make a cash investment in return for about 20% of the combined entity. Yahoo would use Time Warner’s cash and additional funds to buy back several billion dollars worth of its own stock at a price somewhere above Microsoft’s $31-a-share offer.

Last week Yahoo began a two-week trial with Google, using its rival’s technology to place ads on some of its American search results. The trial should tell Yahoo whether outsourcing its ads to Google would have a significant impact on its advertising revenues.

Small text ads tied to web searches account for roughly 40% of the American online ad market. In recent years AOL, Microsoft’s MSN and Yahoo have all lost market share to Google. According to estimates from eMarketer, Google’s share of the American market jumped to 28.4% last year from 13.1% in 2004.

As the online ad market matures and big brands shift more of their campaigns online, display advertising, such as banner ads and video ads, are expected to be the next growth area. Google has already moved to beef up its display advertising business with the acquisition of the internet advertising-services company Double Click and is trying to take advantage of the popularity of its YouTube video site to further build its presence.

Yahoo makes an attractive partner because of its huge audience – 137m American visitors in February – ahead of Google, Microsoft, AOL and MySpace. But as a solo business Yahoo is beginning to look old-fashioned and faces increased competition from social networks such as Facebook and video sites like YouTube.

AOL recently bought Bebo.com, Britain’s biggest social network site, and remains a big draw on the web. But AOL has been an albatross around Time Warner’s neck since its takeover in 2000. A potential merger of AOL and Yahoo met with muted reaction from shareholders, analysts and insiders. Microsoft is crying foul that an AOL/Yahoo/Google combination would be anticompetitive.

Brad Smith, Microsoft’s general counsel, issued a statement saying: “Any definitive agreement between Yahoo and Google would consolidate over 90% of the search advertising market in Google’s hands. This would make the market far less competitive, in sharp contrast to our own proposal to acquire Yahoo.”

Tellingly, Yahoo’s shares have stayed stubbornly below Microsoft’s $31 offer. “Microsoft remains the most motivated and best capitalised option for Yahoo,” said Stanford Group analyst Clay Moran. “A Yahoo-AOL merger does not provide Yahoo shareholders value equivalent to the existing Microsoft bid.”

Ali was surprised that Microsoft had let the proposed deal drag on for so long. “If they upped their offer, this would all be over,” he said. AS the internet’s biggest players circle Yahoo, each appears to be exploring its options. Under one plan, News Corp could combine MySpace with Microsoft’s MSN and make a joint bid for Yahoo. If successful it would create a new internet giant. Executives close to the talks described them as “fluid” but pointed out that News Corp had held on-off talks with Yahoo as well as Microsoft.

A News Corp deal with Microsoft could be further complicated by the fact that Google has a $900m exclusive ad deal with MySpace that runs until 2010. And there is bad blood between Microsoft and Google that could have serious consequences for parties caught in the middle.

Companies usually pretend that business is not personal. Microsoft and Google don’t bother. “I’m going to f*****g kill Google,” Ballmer said in one meeting, and “bury” chief executive Eric Schmidt.

Google founder Larry Page has said that Microsoft is a “convicted monopolist and has a history of not playing fair”. But in the latest phase of the internet’s development, everyone seems to own a piece of everyone else. On the web, complexity is guaranteed and even when Yahoo reaches a decision, the machinations are unlikely to end.

A Yahoo/AOL combination would dominate e-mail and instant messaging. Web watchers expect the two forms of internet communication to be central to the next generation of websites, and the European Union has already expressed concerns about one company controlling so many accounts.

Google’s powerful lobbying team is gearing up for a fight. Google’s legal chief, David Drummond, publicly attacked the deal when it was announced. “Could the acquisition of Yahoo allow Microsoft – despite its legacy of serious legal and regulatory offences – to extend unfair practices from browsers and operating systems to the internet?” said Drummond.

His answer, unsurprisingly, was “yes”.

Next week Yahoo will release its latest financial figures. Some analysts believe that Yang is delaying a decision on Microsoft in the hope that the results will reassure shareholders that the company can go it alone, or at least put pressure on Ballmer to increase his bid. A week later and Yang runs into Ballmer’s deadline.

Most analysts are now betting that Microsoft plus extra cash will win the day. “It’s got to end soon, right?” enquired one media executive involved in the talks. But right now, nobody is exactly sure how.

WHAT THEY WANT

Microsoft The world’s leading software producer needs to increase its internet presence. Acquiring Yahoo would allow it to challenge Google’s dominance in search.

Google The world’s No1 search engine and market leader in search advertising is attracted by Yahoo’s audience – it has 137m American visitors a month. The rivals have joined up for a two-week advertising trial.

AOL The company recently bought Bebo.com but is not loved by its parent Time Warner, which would fold AOL into Yahoo in return for a stake. A deal would give the pair dominance of e-mail and instant messaging.

News Corp The MySpace owner wants to expand on the internet. A combination with Yahoo would give it access to the second-biggest search engine and a huge pool of consumers.

Yahoo The company needs one or more of the above. It was once the dominant search engine, but its share has dwindled. It wants to increase its ad revenues and get a piece of the popular social networking business.