For online ads, less may be more for competition

IDG News Service - Conventional wisdom says that when a market consolidates from three big players to two, competition suffers. But for online advertisers watching the Microsoft-Yahoo deal unfold on Wednesday, some observers said the reverse may be true.

That's partly because of the unusual nature of the online ad business, particularly for search advertising. Google is so dominant in this world that "competition" may not be

the word for what Microsoft and Yahoo are able to offer today.

"Microsoft and Yahoo are both so small that it's often not worth anyone's while to buy anything but Google," said David Smith, CEO of Mediasmith, a digital advertising media agency.

That could change if Wednesday's deal works out as planned. Under terms of the partnership, Microsoft will provide the search engine for all Yahoo sites and sell self-service keywords through its AdCenter, while Yahoo will handle ad sales for both companies' "premium," or larger, advertisers.

The quality of targeted ads depends partly on the volume of user data behind them, and in that area, with 65 percent of searches conducted on its site, Google is king. Combining forces will make Yahoo and Microsoft a more viable alternative, said David Hallerman, senior analyst for online advertising at eMarketer, a research firm in New York.

"They're going to have more data than ever, and it's good technology and an abundance of data that creates relevant results, and that potential for greater relevancy benefits advertisers," he said.

Andrew Frank, a research vice president with Gartner in New York, had a similar view. Users of Google AdWords may now find Microsoft's AdCenter platform to be a more competitive option, "especially in categories where Microsoft has focused Bing’s development like travel and retail," he wrote in a blog post.

The companies could become more competitive in other ways too, he said. By dividing the search advertising market in two, with Microsoft taking the smaller, self-service advertisers and Yahoo handling the premium accounts, the companies achieve "a king of pincer move around Google," he wrote.

"In other words, this sharpens the distinction between Microsoft’s 'technology company' role and Yahoo’s 'media company' role, making it harder for Google to play both against their alliance," he wrote.

Hallerman saw one potential downside in the short term. Advertisers that previously were bidding for keywords at Microsoft or Yahoo will now be bidding for the same terms from one organization, creating more competition among advertisers. "It's an auction-based market, so any time there's consolidation, that tends to raise prices," he said.

Gartner's Frank saw it differently. "That shouldn't happen, because not only are you combining the keyword bidding but you're also combining the inventory from all the Yahoo and Microsoft sites, so if anything it should create a little bit more efficiency because people will be bidding on a larger, combined market," he said.

One "fly in the ointment" are concerns about privacy that could impede the two companies from freely sharing their search data, Frank said. "Watch for this issue to escalate in the inevitable challenge from Google," he wrote.

But overall he sees the deal as a net gain for advertisers. Premium brands and ad agencies "may now find Yahoo to be more capable of supporting brand campaigns with integrated search and search-related targeting capabilities," he wrote.

"To the extent that having only a small number of giant players limits one's choices, I suppose that could be seen as a negative," he said by telephone. "But I'd quickly add that there are over 4,000 ad networks out there, so we're still a pretty long way away from this being a duopoly."

(Stephen Lawson in San Francisco contributed to this report.)