Microsoft’s (NSDQ: MSFT) $44.6 billion offer for Yahoo (NSDQ: YHOO), we keep hearing, represents the potential emergence of a solid number two online. So what does that mean to Google? Does the combination of two weak online players create a strong — or, at least, stronger — competitor? The truth is that it’s too early to tell. We don’t even know what the market thinks, because Google’s (NSDQ: GOOG) current share decline of nearly 9 percent just reflects the moves made after it reported lukewarm earnings late yesterday. From the looks of it, the market isn’t pushing the company one way or another on this news alone. As the MSFT-YHOO wends its way forward over the coming months, there are a few things we can look out for, as they pertain to Google:
– Regulatory: The tie-up could, as has been discussed, give Google some breathing room on the regulatory front. The company has basically become what Microsoft was to tech in the 90s, the undisputed champ, whose every move is eyed suspiciously. Having a real competitor, with deep pockets and enormous reach online, should take the heat off a little bit, as it expands into new areas. By the same token, nobody thinks Google could reasonably make a bid for Yahoo without triggering all kinds of Herfindahl index alarm bells at the DOJ and in Europe. (AOL (NYSE: TWX) would be hard enough.)
– Online advertising: As everyone keeps saying, online advertising is a scale business. Publishers want to go with the company that has the advertisers lined up. Advertisers want to be where the publishers are. It’s a chicken-and-egg, network-effects kind of game. Google has obviously benefited from the fact that its competitors couldn’t match it on scale. Now they may be able to, or at least get closer. If nothing else good were to come out of this deal, the combined Microsoft-Yahoo would have a bigger network of advertisers and publishers and that has its advantages.
– Search: In the ad business, adding 1 plus 1 may get you to 2.5. But just in terms of search market share, nothing changes immediately. Unless Microsoft and Yahoo can churn out some surprises, nothing about this tie-up is going to get Google users to switch, which is ultimately the name of the game. That’s not to say the companies won’t try. As Microsoft’s Ray Ozzie said on this morning’s call: “For the most part, search is still ten blue links.” Microsoft believes the game isn’t over, but the purchase itself isn’t likely to make the difference.
– Infrastructure: Google and Microsoft have both been investing very heavily in infrastructure lately, building up gigantic computing power plants to support a future where everything is done “in the cloud.” Even Yahoo, on its recent quarterly call, discussed its investments into grid computing. The whole thing has the feel of an arms race that’s going to keep accelerating, sucking up capital.