Microsoft, Yahoo, AOL team up on ads
http://www.usatoday.com/money/media/story/2011-11-08/microsoft-yahoo-aol-ad-sales/51126422/1
Search engines like Google, Microsoft Bing, Yahoo and AOL, and social networks like Facebook make profits mainly from their ads sale. However, how hot their ads spots are is directly related to how dominant they are in their field. Because all advertisers want their products information saw by as many consumers as possible, they will care a lot about the click-through rates. As suggested by the article, in US online ad marketing, Facebook has a 16% share and Google has a 9% share. After buying DoubleClick’s ad service for $3.2 billion in 2008, Google expand their service from pure text ad service to graphical ad display, expediting the development of Google online advertising significantly. On the contrary, Yahoo has a 13% share, Microsoft has a 5% and AOL only has a 4% percent. What’s worse, these three companies’ shares are decreasing greatly year by year.
In this context, the alliance of Microsoft, Yahoo and AOL is, considered by many, an excellent move to retain dominance and revert the trend of losing against Facebook and Google.
<Figure 1: A1, A2 are advertisers that want to buy ad space from Yahoo, Microsoft and AOL>
<Figure 2: Situation after alliance>
First of all, sharing resources and information among the three companies could give them more power when negotiating with the advertisers. As Figure 1 & 2 suggests, before this alliance, advertisers A1 and A2 can both choose from three service providers. So they can trigger competition among sellers and thus have greater power in the negotiations. But after the team-up, the alliance become monopoly, hence become the more powerful side in the negotiation. In summary, the alliance will get better contracts than before. In addition, sharing information could give better allocation of resources and thus optimize the social welfare in economical sense.
<Figure 3>
Secondly, consider the advertisers as consumers and ad services as products. Now, let’s look at Figure 3. According to the network effects theories, z’ is an unstable critical point. When the fraction of population value z* goes beyond z’, there will be a pushing-away force that pushes z* to the second critical point z”, which is stable. After the alliance, the total share of them is 21% which will very likely be greater than z’. If so, the alliance could expect an increase in online ad market share. Furthermore, by close communication and assistance among each other, the cost of the product, which is the online advertising service in this case, will be lowered, which will lower the price p*. A cheaper sale price will further lead to a smaller z’ and a bigger z”.
Overall, the collaboration among Microsoft, Yahoo and AOL will have significant positive effect on all of them and help them rival against Google and Facebook in the online advertisement market battle.