how microsoft acquired yahoo | search business case
DESCRIPTION
Analysis of Yahoo search business acquisition by Microsoft from the economic view.TRANSCRIPT
Analyzing decision of the European Commission
Microsoft | Yahoo! Search Business
Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA
Decision of European CommissionMarket overviewPositive effectsNegative effectsPost-transaction analysisConclusion
European Commission
Parties
Microsoft Yahoo!
− Online web-wide algorithmic search
− Search advertising businesses including online search advertising platform Panama.
− Internet search platform, Bing. − Online search advertising
platform, adCenter.
Online Services Business division
European Commission
Subject − 10-year exclusive license to Yahoo's search technologies.
− Yahoo internet search and search advertising staff.
− Microsoft as the exclusive internet search and search advertising provider used by Yahoo.
− 12% of the search revenues generated on Yahoo’s and its partners' websites during the first five years of the agreement will go to Mirosoft.
− Rest 88% will go to Yahoo as a traffic acquisition cost.
European Commission
Decision
Horizontal Merger approved
European Commission
Market overviewPositive effectsNegative effectsPost-transaction analysisConclusion
Organic web search
Search-based advertising
Non-search-based advertising
Contextual
Text
Contextual Non-context
Text Display Display
Adapted from European Commission (2008)
Market overview
0
10
20
30
40
50
60
2010 2011 2012 2013 2014
Paid search Display Classified
Source: ZenithOpen
Market overview
Advertisers
Users
Market overview
A
UZero-price consraint
Auction bidding:
Generalized Second-Price
Market overview
A
U~ Single-homing
~ Multi-homing
Market overview
Market overview
Production costs Switching costs
Market overview
Production costs Switching costs
− Highly specific fixed costs − Negligible variable costs − Sunk
Market overview
− Hardware (USD 1 000 mln) − Human capital (USD 1 000 mln) − Server infrastructure − IP patents − Algorithm development − Algorithm update − R&D
Production costs Switching costs
− Highly specific fixed costs − Negligible variable costs − Sunk
Market overview
Production costs Switching costs
High Low − Highly specific fixed costs − Negligible variable costs − Sunk
Market overview
− One click away
Production costs Switching costs
High Low − Highly specific fixed costs − Negligible variable costs − Sunk
− Credence good
Market overview
− One click away
Production costs Switching costs
High Low − Highly specific fixed costs − Negligible variable costs − Sunk
− Credence good
Network externalities
Market overview
− One click away
Production costs Switching costs
High Low − Highly specific fixed costs − Negligible variable costs − Sunk
− Credence good
Network externalities
High entry barriers
Market overview
− One click away
Production costs Switching costs
High Low − Highly specific fixed costs − Negligible variable costs − Sunk
− Credence good
Network externalities
High entry barriers
High market concentration
Market overview
GoogleYahoo! BingOther
UK France Germany
Ireland Italy SpainDigital Clarity. (2011). Yahoo & Bing Search Engine Merger. Available at http://www.digital-clarity.com/blog/search-engines/yahoo-bing-search-engine-merger/
92% 94,76% 95,69%
94,67% 97,54% 96,96%
European Commission Market Overview
Positive effectsNegative effectsPost-transaction analysisConclusion
Microsoft Yahoo!
− Economies of scale − Reduction of costs
Positive effects
Microsoft Yahoo!
− Economies of scale − Reduction of costs
− Rationalisation of operational costs − Stronger competitor to Google − Greater value to advertisors
Positive effects
European Commission Market overview Positive effects
Negative effectsPost-transaction analysisConclusion
Merger
Advertisers
UsersPublishers
Distributors
Merger
Advertisers
Merger
Advertisers
− Increased cost per click (CPC) − increased bidder density for
particular keywords
Merger
Users
Merger
Users
− reduction of variety of choice − degradation of organic search − unilateral effect
Merger
Publishers
Merger
Publishers
− increased competition among publishers − reduced competition between the remaining
advertising platforms − lower prices paid for publishers’ web space
MergerDistributors
MergerDistributors
− reduced competition between search platforms for distribution agreements
− increased Microsoft’s ability to leverage its market power in areas other than online advertising
European Commission Market overview Positive effects Negative effects
Post-transaction analysisConclusion
0,00%10,00%
20,00%30,00%40,00%50,00%60,00%70,00%80,00%90,00%
100,00%
July 2009 April 2014
AOL, Inc.
Ask Network
Microsoft sites
Yahoo! sites
Google sites
Post-transaction analysis
64,7% 67,6%
19,3% 10%
8,9% 18,7%
Total U.S. search market share – Home & Work Locations (2009, 2014). ComScore Explicit Core Search Share Report. comScore qSearch
Post-transaction analysis
10%13%
22%
37%
-10%
14%
-20%
-10%
0%
10%
20%
30%
40%
Impressions ClickthroughRate
Cost-Per-Click
Yahoo! Bing Network Google
U.S. Percentage change of the main search market indicators of Yahoo! Bing Network and Google on a year-over-year basis (Q4 2011 – Q4 2012)
Marin Software. (2012). Online Advertising Report, October-December 2012
Post-transaction analysis
Consumer surplus under normalized network benefit parameters
Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita Ca’Foscari Venezia.
Post-transaction analysis
Total welfare under normalized network benefit parameters
Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita Ca’Foscari Venezia.
Post-transaction analysis
A merger between two platforms leads to a slight decrease in consumer surplus and total welfare, but to an increase in total platform profits.However, as t → ∞, consumer surplus and total welfare tend to be equal under no merger and merger configurations.
Iurkov, V. (2013). Competition, mergers and exclusive dealing in two-sided markets with zero-price constraints: The case of search engines. Universita Ca’Foscari Venezia.
European Commission Market overview Positive effects Negative effects Post-transaction analysis
Conclusion
Discussion
ReferencesPhotography of Microsoft Office by Jeff Wong, www.jeffwongdesign.com/2013/10/microsoft-office-interior