With or Without Yahoo

Online advertising is going to be big, big, big. An IDC forecast indirectly explains why Microsoft didn't let Yahoo go easily.

The analyst firm estimates that Internet advertising spending will reach $65.2 billion this year, and it will increase to $106.6 billion in 2011. Annual estimated growth rate: 15 percent to 20 percent. Impressive, but still small. IDC said that Internet advertising would only account for 10 percent of spending across all media categories this year and 13.6 percent in 2011.

Fortunately for Microsoft, because so much ad money is spent offline, there's still time to get search and online advertising right, with or without Yahoo. Now that could be a U2 song revisited:

See the stone set in your eyes
See the thorn twist in your side
I wait for Yahoo

Sleight of hand and twist of fate
On a bed of nails she makes me wait
And I wait without Yahoo

With or without Yahoo
With or without Yahoo...

And you give yourself away (to Google)
And you give yourself away (to Google)
And you give
And you give
And you give yourself away (to Google)

You get the idea. Microsoft has got to go on either way.

Here's where the "without Yahoo" hurts: Keywords will account for a whopping one-third of online advertising spending through 2011, according to IDC. Combined Microsoft-Yahoo search would have given Microsoft at least a fighting chance against the Google keyword machine.

Something else: IDC said display advertising would account for 20 percent of worldwide ad spending over the next three years. Display advertising is a category where Yahoo actually does well (and Microsoft is doing better).

Microsoft has been throwing out number $80 billion for Internet ad spending by 2010. I stand corrected. I faulted Microsoft's math, but IDC's estimates make that $80 billion just about right.

IDC's forecast is yet another slap in Microsoft CEO Steve Ballmer's face. He wanted Yahoo but ended up driving the dot-com pioneer to give itself away to Google—by way of an ad-and-search sharing deal.

I still contend that from an integration perspective, Yahoo would have weighted-down Microsoft to Google's advantage. But reasons for an acquisition look surprisingly stronger now then they did when Microsoft withdrew its acquisition offer:

• Billionaire Carl Icahn's proxy fight is absolutely undermining the credibility of Yahoo's board (as I said that it would).
• Important executives are leaping overboard as Yahoo takes on water (I keep thinking of the scene in "Titanic" where steerage passengers follow fleeing rats).
• Yahoo's executive leadership—once fired up to revive the company—is looking more directionless.
• In context of the aforementioned problems, Yahoo's stock is finally nearing free-fall.

Microsoft may yet have a chance to pick the search business from Yahoo's rotting bones, although I maintain my opinion that Microsoft's unsolicited takeover hugely contributed to Yahoo's current plight. Before Microsoft's bid—and even a few months afterwards—I saw Yahoo CEO Jerry Yang as steering the company to recovery. I'm no longer confident that he can do it, based on where Yahoo is in the nearly two months since Microsoft withdrew the offer.

Microsoft's alternative, selling search, would have lobotomized Yahoo. But if the body is going to die off anyway—and slowly—maybe a brain transplant would be a good solution. Saving search would preserve something. I must qualify: That's a sensible strategy only if Yahoo can't survive intact. In which case, it's time for Yahoo to fill out that organ donor card, with Microsoft designated as the recipient.

Yahoo's survival and whether or not Google or Microsoft gets some of Jerry Yang's company is an important topic in context of IDC's numbers. While Google, Microsoft and Yahoo are perceived to be competitors, they are not in the greater advertising context. The amount of ad money spent everywhere else, dwarfs Google's online advertising and search dominance.

Google-Microsoft-Yahoo competition is really about jockeying for position to better compete with offline ad spending and to make the biggest bucket for catching those advertising dollars when they finally move online. Right now, Microsoft has a puny bucket compared to Google. According to ComScore, in May, Google's share of worldwide searches was 61.8 percent, compared to 8.5 percent for Microsoft.

Microsoft still has some time, as long as so much ad spending goes offline. It's the bucket's size in three years or even five that will matter more.

Microsoft's 2008 problem: Its bucket wouldn't be as big as Google's, with or without Yahoo.