These days, the major news in technology/media industry has been possible acquisition of Yahoo! by Microsoft Co.  It seemed like these two business moguls were very close to merging together as Microsoft pursued actively after Yahoo!  However, the Board of Directors of Yahoo did not accept Microsoft’s bid and the acquisition did not happen.  However, in recent news, with News Corp. in talk with Microsoft about joining in its contested bid for Yahoo!, this topic has been receiving major attention again.

Network effect is causing high-tech industries to consolidate into one or two dominant companies these days because the more people who look for deals on eBay, or create a Facebook page, or post jobs on Craigslist, the more valuable these sites are for subsequent users.  This phenomenon may be hurting businesses that desire to buy advertisement slots in popular websites such as Goggle and Yahoo! because with monopolizations in Internet service industry, price for advertisement slots will increase dramatically.  However, in a way, having few dominant companies in online search engine websites may be beneficial for businesses that post advertisement on these websites because due to network effects, businesses can target users and through word-of-mouth, businesses can attract more potential consumers.  Having only two major ad serving companies such as Google and Yahoo - both of which can target ad dollars with great precision to websites dedicated to topics vital to advertisers - could end up curtailing the kinds of content people produce.  Businesses that have their advertisement posted on Google or Yahoo can know precisely what customers are interested in and be able to immediately redirect your advertising based on that.  Hence, in a way, paying higher fee for the advertisement slot on such websites like Google and Yahoo! might be reasonable since, as stated before, the effectiveness of advertisement on these websites may increase.

With most revenues coming from advertisement sales, Google and Yahoo! will take advantage of this situation and generate more revenues in the future.  Hence, that is one reason why though Yahoo! has not been performing well lately and especially compare to its competitor Google, Microsoft is ardently trying to acquire Yahoo! because with more online users available now on the web, advertisement slots are becoming more valuable.  It will be very interesting to see if the government approves an acquisition Yahoo! by Microsoft Co. because Senator Herb Kohl, a Wisconsin Democrat who is chairman of the Judiciary Committee’s Subcommittee on Antitrust, Competition Policy and Consumer Rights, warned about the potential anticompetitive implications.  However, the government did not halt Google’s merger with ad serving company DoubleClick last year.  In the near future, it seems very likely that Microsoft will acquire Yahoo!

Sources:
http://www.csmonitor.com/2008/0206/p01s01-usec.htm

http://www.nytimes.com/2008/04/10/technology/10google.html?_r=1&scp=1&sq=Yahoo%21+microsoft&st=nyt&oref=slogin