Google's Run for Search Money - TheStreet


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will have to make room for


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at the paid-search buffet, but the market is growing fast enough that no one is likely to go hungry for a long time.

Last year, after Microsoft launched its own search algorithm, many expected it to follow with a paid ad-search platform along the lines of Google's AdSense and Yahoo!'s Overture. Sure enough, Microsoft unveiled adCenter this week, a clear attempt to gate-crash the lucrative market that helped Google achieve a billion dollars in revenue last quarter.

After taking a look at adCenter, analysts Thursday seemed to conclude that Microsoft will be a big player in the market, but not so big that investors in Google and Yahoo! need to be worried.

"In general, advertisers are looking for more supply of search ads, not less," Benjamin Schachter, an analyst at UBS, wrote in a report. "We believe the vast majority will use all three. For the advertiser, it is not a choice of one or the other." UBS has acted as a manager or co-manager of a securities underwriting for Google and received investment banking compensation for underwriting activities for Google and Microsoft in the last 12 months; and it makes a market in the securities of Google, Microsoft and Yahoo!.

The impact of Microsoft's move may be bigger a few years down the road. Yahoo! has an affiliate contract that MSN now has good reason to terminate when it expires in 2006. But if Microsoft, as expected, expands its paid-search platform beyond its MSN sites, the impact could be felt more at the other two leaders in the search industry.

"MSN's entry could affect search economics and market share longer-term," Marianne Wolk, an analyst at Susquehanna Financial Group, wrote in a report. "Over the next few years, we believe there is a potential to see major shifts in market share, search economics and the search ecosystem."

"MSN has a disproportionate number of searches emanating from work-based computers, which may indicate its audience has a high commercial value," wrote Wolk. "Longer term, MSN may open its networks to traffic partners as existing contracts with Yahoo! and Google expire in 2006/2007." Susquehanna has not performed underwriting activities or made a market in Google, Microsoft or Yahoo!.

Already the competition among search companies is showing signs of heating up, with analysts noting signs that Yahoo! is expanding its paid-search products to smaller businesses.

"There has been speculation this week that Yahoo! will be introducing an automated contextual publisher network for small and medium-sized Web publishers, which management has not denied developing," wrote Lauren Rich Fine, an analyst at Merrill Lynch, which has not done any underwriting with Google, Yahoo! or Microsoft in the last 12 months, but which makes a market in securities of Yahoo! but does not make a market in securities of Google or Microsoft.

"Yahoo already offers content matching for larger advertisers, such as on a negotiated contract basis, but with an automated online self-service program, smaller and medium-sized publishers will be able to sign-up and serve ads more easily," wrote Fine.

The competition from Microsoft is likely to have an impact not just on the market shares of Google and Yahoo!, but potentially on the way they conduct their searches as well. To date, both companies have strived to offer search that is tailored toward the personal demographics of the user, but they have been held back by privacy concerns regarding personal data. Microsoft's adCenter appears to target ads based on demographic and behavioral data gleaned from MSN.

"If MSN's strategy is accepted, we would expect Yahoo and Google to move in this direction," Wolk wrote.