Microsoft may pick own services over Yahoo's

Redmond could choose its own ad platform and mobile, but stick with Yahoo's search engine, e-mail, and Web 2.0 applications.

While Microsoft and Yahoo do the M&A dance, a big question lingers: which parts of Yahoo would survive if the deal were to go through?

Microsoft Chief Executive Steve Ballmer has said if his company's proposed acquisition of Yahoo goes through, the Yahoo consumer brand would live on, which could be the death knell for MSN. Microsoft has said Windows Live and Office Live brands will likely stay, but Windows Live could be winnowed down.

The brands have different strengths in different regions. While they jockey for second place to Google in the U.S. market, Yahoo is hugely popular in Asia and Microsoft does very well in Europe. Eliminating the bigger brand in any particular region could send those users to Google and mean fewer ad dollars.

Then comes the regulatory question: would merging the companies pose any threats to competition in any markets? Google Chief Legal Officer David Drummond has warned that Microsoft could try to use the merger to extend "unfair practices from browsers and operating systems to the Internet."

That statement may be a bit of an overreaction and even hypocritical , but antitrust experts say there are some areas that could be murky with the proposed merger.

Regulatory perspective
Regulators may look at how the merger would affect the Internet advertising market, just like they did with Google's proposal to acquire DoubleClick. U.S. regulators have approved that deal, but the review is pending in the European Commission. The U.S. Federal Trade Commission found that Google and DoubleClick were not direct competitors in any relevant market. Google is the king of search advertising and DoubleClick is strong in display advertising.

Yahoo has nearly 19 percent of the display ad market in the U.S. and Microsoft has nearly 7 percent, bringing their combined share to about 26 percent, while Google only has 1 percent, according to ComScore. In paid search, which so far has proven more lucrative, Google has about 70 percent market share in the U.S. That's compared with Yahoo's 9 percent share, with Microsoft's being much less than Yahoo's, according to eMarketer.

"One place to look would be, will the combination of the two companies lessen competition in the markets for Internet advertising?" said J. Bruce McDonald, an antitrust lawyer at Jones Day, a former deputy assistant attorney general with the U.S. Department of Justice's antitrust division.

Given that the FTC has already said it considers the display and search ad markets as discrete, this is likely not to be too much of an issue.

Looking at the e-mail and instant-messaging markets, a combined company would have about 75 percent of each worldwide, with 58 percent in the U.S. That compares to Google's 15 percent share in e-mail and 1 percent or less share in IM, according to ComScore figures.

Although combining these two heavy hitters in these markets creates a powerhouse, consumers have many options, so chances are regulators won't be concerned. However, the regulatory review could take into account the relationship between Web-based applications and desktop software and how much they compete.

"If the future of computing is going to be determined in part by the competition between putting the smarts of the computer on your desktop or in a central location where users get it off the Internet, then Microsoft and Yahoo will be competitors," said McDonald.

Which services would win out?
Would Microsoft choose to keep its own businesses in these overlapping areas, or not? It's hard to tell.

Microsoft will want to have one ad platform so that marketers have one set of tools to use and one interface. It's likely to go with its own AdCenter given all the investment it has made, including the acquisition of ad firm Aquantive, and the demographic tools that Yahoo doesn't have, said Matt Rosoff, an analyst at Directions on Microsoft. (Rosoff is also a contributor to the CNET Blog Network.) The company would gain lots of inventory on Yahoo sites and Yahoo's network of publishers.

Microsoft is so new to search that it could defer to the more senior algorithms Yahoo acquired from Inktomi, but then retain some of the Live Search interface, Rosoff said.

There is already interoperability between the IM applications and it's a toss up as to which brand will live on. Integration of the different e-mail systems is more troublesome. Given the confusion Microsoft has created with its MSN, Hotmail, and Live services, the company could choose to keep the Yahoo brand, which recently got an overhaul that makes it more desktop-like.

"The Yahoo brand has more cachet among consumers," said Allen Weiner, an analyst at Gartner.

As far as mobile, Yahoo Go has a slick interface, but Microsoft has already established paths to hardware with its Mobile CE operating system and deals with AT&T and Verizon. And Microsoft just announced on Monday that it is acquiring T-Mobile Sidekick maker Danger, which gives Redmond yet another mobile operating system. This is another area where there is likely to be much debate over which to choose.

They also overlap in content sites, with strengths in different areas. Yahoo's popular Finance is likely to stay, as well as My Yahoo, Yahoo Answers, and Flickr. Microsoft's bird's eye view and 3D map viewer plug-in give it the advantage on maps. With video, it could go either way, with both eclipsed by YouTube.

Whatever Microsoft does, the integration of everything from technology teams to infrastructure and services will take years to accomplish. As the acquiring company, Microsoft is likely to favor its own technologies over Yahoo's in areas where there is not a clear leader. Microsoft also designs with software and services in mind, which creates more of an incentive to maintain its products.

CNET News.com's Ina Fried contributed to this report.
 

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