Friday's sale of DoubleClick to Google (Nasdaq: GOOG) is just one example of a long series of opportunities that Microsoft (Nasdaq: MSFT) has passed up to build its MSN and MS Live Search business. The lead that Google has built, and renewed strength at Yahoo!' s (Nasdaq: YHOO) search operations, make it almost certain that Microsoft can not get back into the business.
Microsoft Falls Behind.
During the late 1990s internet usage was dominated by web portals built around internet service providers. The two largest companies in that business were AOL and Microsoft MSN. But, within the last five years, internet search has been the fastest growing part of web activity, and first Yahoo!, then Google, have dominated this business.
Microsoft has offered search capability at MSN for a number of years, but the priority of Microsoft's online operation was to support its software operating system and its Internet Explorer business. The company did not anticipate that search engines would create such a large audience.
Google has grown so quickly that, according to research firm ComScore, it now has about 45% of the search market in the United States, followed by Yahoo! at about 26% and Microsoft at about 12%.
Google built its audience by delivering more accurate and relevant results from its search technology. It created an advertising system around its search that allowed advertisers to match their messages with relevant search terms. The old systems at Microsoft MSN and Yahoo! could also handle basic search functions, but consumers and advertisers found the accuracy of results to be nowhere near Google's.
Yahoo! has made an important effort to catch Google by launching its new Panama product, and early indications are that it works about as well as it larger rival for producing both search and advertising results.
Because of Yahoo!'s large content base in entertainment, finance, online job postings, classifieds and personals, it has also created a huge base for display advertising which has somewhat offset its poor showing in search-based text ads.
Yahoo!, Microsoft, and Google are each trying to gain more of the search market because it is the fastest growing revenue base for internet advertising. Google's revenue grew 70% in 2006, and its market cap is $145 billion. Yahoo!'s cap is only $43 billion (To learn more about market capitalization, please see Market Capitalization Defined).
Microsoft claims that its search is strategic because it supports the company's server and desktop software. The company does not want users of its software to move to other online platforms like Google to do part of their online work. It takes time away from working on Microsoft products and moves the user to other brands. Google now markets word processing and spreadsheet software in direct competition with Microsoft.
However, Microsoft has made remarkably little effort to expand its search franchise. It does not have its software preloaded on most new PCs that ship. Google and Yahoo! have relationships with the larger personal computer companies like Dell (Nasdaq: DELL) and Hewlett-Packard (NYSE: HPQ). This allows their search software to be the default on new machines.
The sale of DoubleClick gave all three companies the chance to buy the largest online, ad-server business. DoubleClick actually stores display ads and puts them on internet pages as they load on computers. Its business is at the crossroads of internet advertisers and the websites that are paid to run their ads.
DoubleClick was sold for $3.1 billion. Rumors are that its revenue runs about $200 million, but, as the largest ad server company in the world, it is a critical piece in the advertising internet puzzle.
The fact that Google bought DoubleClick and that Microsoft, which has larger balance sheet resources, did not, says that the world's largest software company refuses to pay to gain back some of its lost online market share.
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