IDC: Microsoft's Yahoo Deal Could be a Big Hit

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Microsoft’s proposed takeover of search competitor Yahoo may be highly controversial, but it also just might prove to be a successful market counterweight to Google, according to a report by research firm IDC.

“IDC’s data on online search behavior and advertising revenue shows that a Microsoft-Yahoo merger creates a credible challenger to Google’s Web hegemony,” the report, which was authored by 14 IDC analysts, states.

Microsoft made an unsolicited bid on Friday to buy out Yahoo for approximately $44.6 billion which, if completed, would be the largest buyout in tech industry history.

One thing that Microsoft should not do, the IDC report suggests, is to dilute or destroy the well-established Yahoo brand, by renaming it to its own “Live” or “MSN” branding.

“For a long time, Yahoo was seen as an important online alternative to Microsoft (the ‘anti-Microsoft’) by many consumers … [and] some users may continue to harbor similar feelings [so] retaining the Yahoo brand would be an important step toward keeping these long-time users,” the report continues.

Still, the combination would produce a strong competitor to market leader Google, particularly in the U.S. “Together, Yahoo and Microsoft command 22.7 percent of the online advertising market share [in the U.S.], in contrast to Google’s 32.5 percent.”

Also in the U.S., the combined “audience reach” of Microsoft and Yahoo – at nearly 74 percent of the audience, would come close to Google’s 80 percent. While that may seem to be an illogical disparity, many users frequent more than one search engine, the report states. By themselves, for instance, Microsoft’s search properties have 51 percent audience reach while Yahoo has almost 62 percent, although their combined reach is only 74 percent.

There are other likely synergies available as well.

“In Web search, pooling forces will bolster their position, even if gaining ground against Google will still be hard. In display ads, adding Microsoft’s share will make Yahoo’s market leader position nearly invulnerable.” Though the report didn’t state it, Microsoft’s $6.1 billion acquisition last summer of aQuantive clearly is part of that formula.

Further, Microsoft’s recent announcement of its intent to acquire Norwegian enterprise search firm Fast Search & Transfer (FAST) for $1.2 billion could also be very complementary to a Yahoo acquisition.

“If we consider a Microsoft-Yahoo-FAST combination, Microsoft is largely a business-oriented software vendor [so] it makes sense for them to get into the business of selling infrastructure software or middleware to businesses that want to monetize their audience and their content,” the report states.

Additionally, Yahoo would contribute to Microsoft’s play in the mobile space with respect to “search, location-based services and advertising — three key revenue growth areas of the future.”

One area where Google would still have both companies stymied, however, is in the video space where neither firm has any offering that can touch the explosive popularity of Google’s YouTube.

The report ends on an upbeat note for the potential merger: “Without combining forces, Microsoft and Yahoo would only catch up to Google in the long run (five plus years), and only if the stars aligned in the right way. With a merger, that goal is much closer.”

This article was first published on InternetNews.com.