When Microsoft Corp. (NASDAQ:MSFT) reported earnings 2 cents lower than expectations Thursday, the news may have put smiles on the faces of Yahoo! Inc. (NASDAQ:YHOO) board members, who were reportedly meeting to discuss a search and online advertising deal with the software company.
Reflecting a decline in sales of personal computers, many of which come with its software, Microsoft posted its first ever annual decline in sales of its Windows operating system and reported weak sales across all units.
Microsoft's earnings may give Yahoo! some leverage in the negotiations of a deal that has been a long time coming and is rumored to be near finalizing, although Yahoo!'s own earnings after market close Tuesday were mixed. The search engine maker's profits were up 10% -- beating analyst expectations of 8% -- but revenues slid 13% and revenue from search advertising dropped 15%.
Recently, it was Microsoft that appeared to have a leg up, as its new Bing search engine has been gaining marketshare. Yahoo! CEO Carol Bartz even gave Microsoft "kudos for Bing" in her company's conference call on Tuesday.
Microsoft remains a distant third in the search market. A deal with second-place Yahoo! would help it compete with market-leading Google Inc. (NASDAQ:GOOG).
"The competition is pretty intense, and it's coming down to two guys, both Microsoft and Google," Bernie McGinn, chief investment officer at McGinn, McKean & O'Neill Inc. in Alexandria, Va., which holds shares of Microsoft, told MarketWatch. A partnership with Yahoo! would "strengthen the whole story" for Microsoft, McGinn says.
If Microsoft does strike a deal with Yahoo!, it will be fascinating to see how it affects the company's bottom line.
"MSFT has identified the opportunity in the online advertising space as its top strategic priority," writes Broadpoint AmTech analyst Yun Kim in a research note Friday morning that reflects his concerns about the stock. Kim says:
It continues to invest heavily in this business, with a higher rate of R&D and S&M costs than its other business segments. It is also likely to engage in some financially unfavorable advertising deals to gain market share. Many investors believe GOOG has such an insurmountable lead that MSFT has no choice but to continue to invest aggressively just to remain a viable alternative to GOOG. This means that MSFT will continue to spend heavily to bolster its online business, without realizing much of the monetization benefit GOOG currently enjoys. - Mary Kathleen Flynn
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Well it may be a slight advantage in Yahoo's half of the negotiations but as it was pointed out in this article, it doesn't sound like Yahoo is doing all that great either so you could probably call that aspect of it a wash. But certainly I can see where Microsoft needs this deal more than Yahoo does considering they think they are engulfed in a search war with Google.
Should they take that portion of the share, it's definitely a coup for Microsoft but can they do anything with it after? That's what these next few months were going to teach us - if Bing had the legs to actually continuing to gain a significant share. Just buying it doesn't prove that they are any closer to Google but in the numbers.
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