I'm a partner in the advanced analytics group at Bain & Company, the global management consulting firm. My primary focus is on marketing analytics (bio). I've been writing here (views my own) about marketing, technology, e-business, and analytics since 2003 (blog name explained).

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July 29, 2009

Microsoft-Yahoo Search Deal: And Then There Were Two And A Half

Microsoft and Yahoo! announced today that the former's new Bing search engine would now run the latter's search capability.  And, Yahoo! will sell paid search campaigns for the combined capability.  At least for starters, this means Google owns two thirds + of pro forma search volume (per Comscore), and MSFT+YHOO own the other third.  

Yahoo! had no choice but to accept colonization by Microsoft, as its own search technology was going nowhere.  Similarly, Microsoft had to do this deal with Yahoo because in today's tough market (even paid search is seeing only low single digit growth), it couldn't afford to divide its sales force to fight Yahoo in the face of their shared, colossal foe.

It will be interesting to see how much search volume sticks with / moves to each.  I'm guessing there is a curiosity factor that has Bing volume temporarily high, but that Google will hold serve, since Bing's advantages seem concentrated in some commerce-oriented niches.  (Here's a wacky idea though:  Microsoft could reverse one important structural disadvantage with a pre-emptive bid to embed Bing by default in Firefox, when Mozilla's current deal with Google expires in 2011.  Maybe not so wacky if, following long-term trends, IE's browser share drops close to 50% by then, and Google chooses to focus on Chrome.)

The other reason for this deal is for each side to achieve a critical mass of search volume to usefully inform display ad targeting.  Display ad networks have been a surprisingly profitable business, even in tough times (see also for example NET income for VLCK in Q1 of this year).  And the tip of the spear in the trend toward multi-channel optimization of marketing spend has been attribution analysis between search and display channels ("To what degree is a search triggered by display ad exposure, and how can we better target display ads to behaviorally-defined user segments across a network based on their search history?").  So, this deal would seem to be as much about shoring up each side's profit centers as it would be about huddling for warmth in the paid search world.

Given the complexities of having Yahoo! take over Bing sales and operations (through AdCenter), folks at Google should make hay in the short term, since their opponents will be distracted and the transition will create work for customers that arguably doesn't add much value either.  Hopefully, much of this complexity can be absorbed for advertisers by their search agencies, and hopefully they can get paid for some of that.

Notwithstanding interesting riffs on top of the established platforms, and newcomers that are useful in niches, this consolidation is further proof of the diminishing returns to innovation in search as we know it, that is, indexing and ranking unstructured content.  The next big wave of disruption in this category won't happen until we have radical change in the nature of the stuff being searched -- specifically, the advent of "Semantic Web" standards that will structure the underlying data in useful ways.  

It will be interesting to see how The Big Two And A Half left in search react to the propagation of open standards that could level the search playing field.  If the DOJ wants to fight the Search Trusts, perhaps its money is better spent on seeding and supporting those efforts than undoing what nature hath already wrought.


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