Are Microsoft and Yahoo! That Stupid?

I wasn't surprised by yesterday's announcement that Ask.com parent IAC/InterActiveCorp (Nasdaq: IACI  ) extended -- and expanded -- its online advertising deal with Google (Nasdaq: GOOG  ) . The two companies clearly work well together. The real head-scratcher here is why didn't Microsoft (Nasdaq: MSFT  ) and Yahoo! (Nasdaq: YHOO  ) put up a better fight?

Ask.com isn't just the country's fourth most-popular search engine. Despite being well behind Google, Yahoo!, and Microsoft in stature, it is the largest search engine willing to seek a third-party provider for sponsored listings.

In other words, this should have been the mother of all testosterone-driven dinner bells. Ask.com is the prettiest girl to walk into the all-boy sock-hop dance, and Mr. Softy and Yah-oops blew it by letting Google hog up the dance card with IAC for the next five years.

They cracked nerdy jokes by the punchbowl, as Google got the girl. Again.

Dilly of a Diller
It's easy to see why publishers such as Barry Diller's IAC gravitate to Google. It's the alpha dog in paid search. I went over the disparities among the three on that front after the companies posted their third-quarter results last month.

Q3 Online Revenue

Google

$4.2 billion

Yahoo!

$1.5 billion

Microsoft

$0.7 billion

When advertisers spend more than six times as much on Google than they do on Microsoft, what does that mean? Not that Google has six times as many sponsors, although clearly Google has the thicker list of names. Not that a typical sponsor feels that Google is six times more valuable, though clearly the market seems to treat Google as a darling.

What it means is that Google has the perfect combination of: pages to monetize, inventory to deliver, and acumen to blend it all into healthy lead conversions.

Google is generous with its publishers. In last month's report, Google indicated it pays 77% of the ad revenue it receives from its AdSense partners right back to its third-party publishers. It's not a uniform rate. Smaller publishers get a thinner slice, while behemoths like IAC should get 80% to 90% of the action.

So how can Yahoo! or Microsoft compete? I have suggested an ad rate of 100% -- or possibly even more -- is not a bad strategy at this point. This deal was a perfect opportunity for any company not named Google to take on IAC as a loss leader. It's the only way that a distant player in interactive marketing would have a chance to compete against Google, really. But it didn't happen, so here we go watching Google get bigger and stronger. Again.

Playing the giveaway-takeaway ratio
IAC may be a slow-growing media conglomerate, but now that it is splitting into five entities, we will be able to appreciate the company's success in cyberspace on a standalone basis. The company's online media properties grew revenue and operating profits before amortization by 40% and 74% respectively this past quarter. That kind of ad space would look great at the slower growing Yahoo! or Microsoft.

More important, it would have looked even better if the rivals had succeeded in removing that virtual real estate from Google. It's awesome to see Microsoft land Facebook as an ad partner. It's fantastic to see Yahoo! reach out to a growing consortium of newspaper websites.

The rub here is that those deals are only incremental. Swiping a Google partner would make the deal incremental to them, as well as detrimental to Google.

So what's holding them back from aggressively pursuing Google's partners? They're not aiming at the small publishers. Microsoft doesn't have an AdSense-esque program for small and mid-sized websites. Yahoo! has YPN, but it's been a dud, limiting itself to domestic partners and actually showing a year-over-year decrease in revenue this past quarter. They're wasting their time aiming high with sites that know better.

As the punchbowl nerds swap stories, Google is asking for second dances. And getting them. Answers.com (Nasdaq: ANSW  ) re-upped with Big G two months ago. It would be a shock to see other partners like MySpace, MIVA (Nasdaq: MIVA  ) , and Time Warner (NYSE: TWX  ) properties CNN and AOL not renew when the time comes.

The only thing that can stop it is if Yahoo! or Microsoft offer more than Google. No, not just on a percentage basis, because Google's wider ad pool opens itself up to better targeted ads. They have to go above and beyond the 100% mark until they thicken their own list of names. It is then -- and only then -- when this becomes less of an investment in growth and more about sound business.

Until Yahoo! and Microsoft gain the leverage necessary, they are making the enemy tougher to defeat. How much harder will get? Will we get to the point where it is impossible to slay a jabberwock like Google?

If you have to Ask.com, you can't afford it.


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