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A Microsoft-Yahoo! merger: good for the Internet?

The proposed acquisition would leave Google and Microsoft as the only major conduits connecting advertisers and online publishers – until a better search technology comes along.

By Staff writer of The Christian Science Monitor / February 6, 2008

The search biz: Bill Gates's (l.) Microsoft is bidding to take over Yahoo!, led by CEO Jerry Yang (r.)

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Oakland, Calif.

The more people who look for deals on eBay, or create a Facebook page, or post jobs on Craigslist, the more valuable these sites are for subsequent users. It's called a network effect, and it's behind the tendency in a lot of high-tech industries to consolidate into one or two dominant companies.

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It's also the backdrop of the fight between Microsoft and Google this week over control of mutual rival Yahoo!. Microsoft made a $44.6 billion bid Friday for the struggling Internet leader, after failing to persuade government regulators last year to stop Google's merger with ad serving company DoubleClick. Microsoft argued at the time that it could not catch up to Google in delivering certain forms of online advertising because of network effects.

Now Google has reacted to Microsoft's bid by leveling the same cry of creeping monopoly, arguing that a Microsoft- Yahoo! combination would dominate in e-mail, instant messaging, and Web portals. "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?" reads Google's press statement.

Above all, the acquisition would leave Google and Microsoft as the only major conduits connecting advertisers and online publishers. Just how much that bothers certain analysts depends somewhat on whether they think network effects would solidify an unhealthy dominance.

"Search is not really a business that has those network-effect characteristics," argues Jonathan Weber, former editor in chief of The Industry Standard magazine. Much online advertising is currently tied to the results returned by search engines, which has given Google a huge lead – for now.

Mr. Weber recalls an Industry Standard conference in 1999 where insiders ridiculed Google, then a start-up. Their reaction: Why would we need another search engine? We already have Yahoo! and Inktomi and Infoseek and AltaVista. Google's answer: We think we're a better search engine.

The moral of the story, says Weber, is that the moment a better search technology comes along, Google – or a Microsoft-Yahoo! combo – could tumble.

An edge in contextual ads

Google currently handles 56 percent of all US searches, versus 32 percent for Microsoft and Yahoo combined, according to data from Nielsen, an audience metrics firm.

Google's lead in another form of online advertising known as contextual advertising is similarly not fixed in stone, say some experts. Contextual ads are placed on the fly by Google onto third-party webpages whose content matches keywords given by advertisers. So, air travel companies, for instance, might place ads for keywords like "honeymoon" or "vacation," and Google will find pages that seem focused on those topics and place the ads there.

What's the network effect? A glossary of terms

Network effect – A phenomenon in which a good or a service becomes more valuable as more people use it, spurring further growth.

Contextual ads – Online advertisements added on the fly by an automated system, on the basis of content on an online page.

Ad serving companies – A middleman between advertisers and online publishers who takes a cut of the advertising dollar in exchange for placing highly targeted ads.

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