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As ironic as it was to see Microsoft (Nasdaq: MSFT ) crying foul to antitrust regulators this week, I can understand why there are some hard feelings over in Redmond about Google's (Nasdaq: GOOG ) deal with Yahoo! Japan (an independent company that Yahoo! (Nasdaq: YHOO ) has a 35% stake in) to handle the latter company's search traffic and related advertising. With one stroke of the pen, Google stands to acquire more search business than what Microsoft has spent billions to obtain in recent years through its investments in Bing, and it will further cement Google's status as the 800-pound gorilla of global search.
Yeah, that could frustrate me as well.
Google becomes big in Japan
To be fair, Microsoft's complaint to Japanese regulators about the Google-Yahoo! Japan deal being anticompetitive -- a complaint that fell on deaf ears, judging by comments from Japan's Fair Trade Commission -- might have some merit. With Yahoo! Japan estimating that its share of the Japanese search market stood at 57%, and Google's at 37%, the proposed deal would hand Google a virtual search monopoly inside the world's second-biggest economy. Business Insider cites UBS analysts Brian Pitz and Brian Fitzgerald as estimating that the Yahoo! Japan tie-up would single-handedly add another 3% to Google's global search share.
The 3%, interestingly enough, is also what Yahoo! Japan estimated Bing's Japanese share to be. And what comScore estimated Microsoft's entire global search share to approximately be at the end of last year, after factoring in searches on sites such as YouTube and Facebook. Numbers can be pretty cruel at times.
But while the deal might look like a bit of old-fashioned monopolizing to Microsoft (and seriously, who would know better?), it probably just looks like a sound business move to Yahoo! Japan. It's no secret that Google has been running circles around its competitors when it comes to monetizing search traffic. Even with Google's cut, Yahoo! Japan could see its ad revenue increase on account of outsourcing its search business to Big G -- all while eliminating the sales and R&D expenses associated with keeping the business in-house.
And if Yahoo! Japan had decided, like Yahoo! proper, that it simply wasn't worth it for the company to stay in the search business, then Google was the only credible alternative. Unlike the U.S., where Bing had enough scale for Yahoo! to view Microsoft as a worthwhile search partner, Bing's minimal Japanese market share means that Microsoft lacks the critical mass of search data to deliver a user experience that's competitive with what Yahoo! Japan and Google have been offering.
Microsoft the also-ran
The fact that Yahoo! Japan was driven into Google's arms in spite of Yahoo!'s sizable stake in the company, and that Microsoft could do nothing besides complain to antitrust authorities, should drive home Microsoft's outcast status in the global search scene. While Microsoft has clawed its way to 12.7% of the U.S. search engine market (according to comScore) on the back of enormous R&D spending and heavy Bing integration within its MSN portal, its international weakness leaves the company lower on the search industry's pecking order than China's Baidu (Nasdaq: BIDU ) , and closer in status to InterActiveCorp's (Nasdaq: IACI ) Ask.com than to a legitimate rival to Google.
I'd say that makes the $2.35 billion operating loss (!) reported by Microsoft's online services division during its last fiscal year even harder for investors to stomach. Especially during a week when Google gave its investors another reason to think that it has plenty of room to add to the $8.32 billion in operating profit it reported last year.