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Google's rise key to potential Microsoft-Yahoo merger

Three years ago, Yahoo was the search leader, online ads weren't so huge, and Microsoft's dominance on every PC was undisputed. But all that's changed.

It has only taken three years for Google to unseat Yahoo in search, become the online ad king, and get so big it prompts Microsoft to try to buy Yahoo.

Microsoft announced on Friday it has made an offer to acquire Yahoo for $44.6 billion. The news comes days after Yahoo said it would lay off 1,000 workers, saw its fourth-quarter profit fall, and gave lukewarm guidance for the current quarter. By comparison, Google on Thursday posted fourth-quarter revenue of $4.8 billion, up more than 50 percent, while profit rose 17 percent.

Google has been able to capitalize on a basic trend: everyone with an Internet connection does Web search and people doing searches are likely to click on ads next to the results that are related to what they are looking for. Google's search market share in the U.S. is 56 percent, triple what Yahoo's share is and quadruple Microsoft's, according to ComScore.

Largely based on that, and on getting a percentage of revenue every time people click on the contextual ads that Google feeds onto other sites around the Web, the company made nearly $16.6 billion in revenue last year.

Sure, Yahoo had a head start on search. But the company didn't know how to monetize it. Google turned paid search into big business when other companies were banking on banner ads and got hit by the dot-com bust. Google also didn't get bogged down into becoming a portal, creating content, and competing with publisher partners, like Yahoo did.

"Google was out there and executing well early," said Danny Sullivan, editor of Search Engine Land. "Yahoo was blindsided on search and on general online marketing."

Microsoft, having fought off challenges by the likes of IBM, Oracle, and Apple for desktop dominance, didn't realize until fairly recently that the Internet would revolutionize information sharing and computing. The company eventually acquired crawling technology and got into paid search, but was too late to catch up to Yahoo and Google.

"Google's success is it turns the entire Web into billboard space for lease or rent," Sullivan said. "If I want to put contextual ads on my site from Microsoft, I can't do that."

Google has succeeded where others have failed in threatening Microsoft with the prospect of network computing, or "cloud computing," where data is stored on the Internet and can be reached from any computer any time. Why use an expensive desktop application from Microsoft when you can do such things as e-mail and word processing for free on the Web with Google?

Not only has Google toppled Yahoo's world and posed a serious threat to Microsoft, but it is unassumingly taking on other industries as well. Its digital book scanning project aims to open the world's libraries to the Web, but has prompted copyright challenges around the world. The acquisition of popular video site YouTube has helped scare major entertainment companies into action, legal and otherwise. Its automated ad system, coupled with the emergence of online news and local classifieds sites, have cut into newspaper revenue. And now it is developing an open-source-based mobile platform that will mean consumers won't be locked into particular hardware or software when using the Web on mobile devices.

"Google is a disruptive company. We're looking at huge fractures in the telco area, with Yahoo and Microsoft, and in publishing, in indexing library material," said Stephen Arnold, author of several books on Google, including The Google Legacy. "It's absolutely amazing and Google does this by...twitching their big toe."

A combination of good timing (late enough to escape damage in the dot-com bust but early enough to lead), foresight in realizing the potential of search ads, innovation, and vision have made Google the most important Internet company. Its concentration on monetizing search is driving that.

"Search is at the core of what Google does and they have stayed focused on that when Yahoo wasn't focused on that and Microsoft hadn't invested in it yet," said Sullivan.