Microsoft Woos Yahoo - Ad Sales Lost to Google May Be $2 Billion

Bloomberg reports that Microsoft Corp. Chief Executive Officer Steve Ballmer interrupted a Hawaiian vacation to call his top Internet ad man, Yusuf Mehdi, on April 16 after Google Inc. announced its $3.1 billion purchase of DoubleClick Inc.

Ballmer may be about to follow up on his pledge. Microsoft, the world's biggest software maker, has held talks with Yahoo! Inc. about a partnership to develop Web search and advertising programs to fight Google, people briefed on the discussions said. That would help remedy what Mehdi says is his one regret in the past year.

Microsoft probably lost $2 billion in sales last year alone because its search engine doesn't attract as many users as Google, said Matt Rosoff, an analyst at Kirkland, Washington- based Directions on Microsoft.

Google runs four times more Web queries than Microsoft and is gaining market share over the software maker and Yahoo, confounding analysts who expected progress by Microsoft. Buying DoubleClick gives Google an instant position in graphical display ads, one market where Microsoft is beating Google.

Internet ad sales are growing twice as fast as the personal-computer market, where Microsoft's Windows runs most systems.

Microsoft's discussions with Yahoo are in the early stages and focus on a partnership rather than a merger, said one of the people, who asked not to be identified because the talks are private. The New York Post said May 4 that Microsoft may want to buy Yahoo. Both companies declined to comment.

Even together, the combined company would have 38 percent of the U.S. search market, 10 points less than Google, according to ComScore Inc. Yahoo CEO Terry Semel has come under fire after the stock sank 35 percent last year amid delays in new ad programs and earnings that disappointed investors.

It could take at least five and maybe 10 years for Microsoft to gain significant traction against Google's search, Mehdi said. A Yahoo partnership could make Microsoft a threat right away and may be its only choice to keep up with Google's acquisitions.

Microsoft's stock gained 30 percent in the past year on optimism for the new version of Windows, compared with a 19 percent increase at Google. Microsoft fell 41 cents to $30.56 on May 4. Yahoo rose $2.80, or 9.9 percent, to $30.98 on reports of the talks. Google fell $2.11 to $471.12.

Microsoft already was prepared to spend $16 billion in the next three years to improve its online business, said Goldman analyst Sarah Friar. Now a year into an effort to spur search ad sales with a program called AdCenter, Microsoft attracted 100,000 advertisers. Mehdi says Google, which doesn't disclose client numbers, may have 1 million.

Microsoft's share of searches widened 0.4 percent to 10.9 percent in March, the biggest rise since releasing its own search in November 2004, said Reston, Virginia-based ComScore. Microsoft had 14 percent at the time, using an earlier product.

Microsoft's ad sales grew 23 percent last quarter, less than Google's 66 percent. Microsoft had $1.61 billion in ad sales in 2006, less than the $10.6 billion for Google, said Charles Di Bona at Sanford C. Bernstein & Co.

While hurt by low search numbers, AdCenter itself gets good reviews. Since unveiling AdCenter almost six years after Google's software, Mehdi says customers find more of the people who see the ads actually make purchases than with Google or Yahoo.

Last quarter, Microsoft surpassed the revenue received for each computer user who clicked on an ad it had achieved with an earlier system, a quarter ahead of plans.