Yahoo, Microsoft And AOL Join Forces In Online Ad Deal

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Includes: AABA, AOL, GOOG, MSFT
by: Zacks Investment Research

Microsoft Corp. (NASDAQ:MSFT), Yahoo Inc. (YHOO) and AOL Inc. (NYSE:AOL) have come together to sell each other’s extra online ad space in an attempt to compete with Google (NASDAQ:GOOG) and the social networking ace Facebook.

Google has been the leading search engine for a number of years. However, market dynamics appear to be changing now, with companies scrambling to build their brands in the fast-growing ecommerce market. Independent research firms are therefore predicting that display ads will overtake search ads in terms of revenue by 2015. Therefore, Google is racing to build a position in the space to protect its online advertising revenue.

Facebook in the meantime has become extremely popular with users, so much so that it is already the most popular social networking platform. The company is now leveraging this position (and the user data collected) to sell ads. The user data is in fact proving to be invaluable, since it enables the company to target ads very effectively. Additionally, Facebook primarily uses display ads, where growth rates are expected to be higher.

Facebook is gearing up to lead the U.S. display market this year, with an estimated 17.7% share of spending by advertisers, compared with Yahoo’s 13.1% and Google’s 9.3%, according to eMarketer, an online research firm.

On the other hand, Yahoo, Microsoft and AOL have repeatedly failed to deliver. Microsoft and Yahoo have an agreement that gives Microsoft access to Yahoo user data in exchange for the cost of powering Yahoo searches. However, all this has achieved so far is higher costs for Microsoft and market share losses for Yahoo. As a result, Microsoft's online division continues to generate losses, although at a declining rate.

The agreement, to operate in the U.S.and Canada, calls for sharing of revenue generated, although Microsoft will not be a party to business generated in Canada. Microsoft and Yahoo will initially serve as the two marketplaces from which the partners would procure inventory for resale to advertisers and agencies. AOL has the option of using its own exchange technology subsequent to the partnership's launch in January 2012.

The alliance between the three is basically a way of cross-selling excess inventories in a way that would not attract anti-trust watchdogs. Microsoft, Yahoo and AOL hope that the extension of their individual markets as a result of the alliance would enable them to lower their inventories and generate additional ad dollars. However, while there could be some positive impact, we will take a wait-and-see approach because all three companies have been struggling. Therefore, a remarkable improvement may not be on the cards.

Currently, Yahoo and Microsoft both have a Zacks #3 Rank, implying a short-term Hold recommendation.

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