Microsoft reaches a turning point online

Recent rumours of a Microsoft takeover approach to internet giant Yahoo may be fading, but the fact that the software supplier would even consider such a deal highlights its desire to reposition itself online.

The fierce competition in the web-based services market, in which Microsoft and Yahoo is merely the latest headline, shows how far the online world is still in flux and how dominance is still up for grabs.

Microsoft has historically only made much smaller acquisitions, its largest purchase being Great Plains Software for $1.4bn (£707m) in 2001.

But its recent challenge to Google, in a bidding war that saw online advertising broker DoubleClick eventually bought by the search giant for $3.1bn (£1.6bn), is growing evidence that the software maker is pursuing a new strategy.

The online advertising market is already worth $2bn (£1bn) annually, and is growing a massive 41 per cent every year. But uncertainty about where the market will develop was behind the aggressive bidding over DoubleClick, and the enormous final purchase price. And it is also behind Microsoft’s interest in Yahoo.

Google is already dominant in the nascent pay-per-click market, where advertisers pay for sponsored links. And although the revenue stream remains strong the company wants to extend its reach into display advertising – brokering the sales of banners on third-party web sites – which is DoubleClick’s core business.

Yahoo is also strong in display advertising following its $680m (£344m) purchase of display advertising broker Real Media last month. And it has a well-established linking platform, which promotes web sites in its own directory.

‘It is the directory and the banner ads that Microsoft would have been interested in, rather than the Yahoo search engine,’ said Craig Upton, managing director of
online advertising firm Weblinx.

Google has 70 per cent of the pay-per-click market at the moment. But despite its apparent dominance, and its success in the battle over DoubleClick, Microsoft’s day is far from over, says Ovum analyst David Bradshaw.

‘Microsoft knows it must adapt, it has a huge cash-pile and immense patience,’ said Bradshaw.

‘It could still get involved in a price war in the pay-per-click market because it has the funds to support a long battle in this area.

‘It also has the second largest base of internet mail users, bigger than Google, and it could look for ways to gain revenue from that,’ he said.

Microsoft is keen to brush off the significance of Google’s DoubleClick victory.

‘We will continue to invest heavily in innovation and partnerships in this area,’ said Kevin Johnson, head of the firm’s advertising businesses.