How Microsoft acquired Yahoo | Search business case

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Analysis of Yahoo search business acquisition by Microsoft from the economic view.

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How Microsoft acquired Yahoo | Search business case

  1. 1. Analyzing decision of the European Commission Microsoft | Yahoo! Search Business Competition, Strategy, and Institutions Yulia AN | Yulia MIRONOVA
  2. 2. Decision of European Commission Market overview Positive effects Negative effects Post-transaction analysis Conclusion
  3. 3. 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
  4. 4. 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.
  5. 5. European Commission Decision Horizontal Merger approved
  6. 6. European Commission Market overview Positive effects Negative effects Post-transaction analysis Conclusion
  7. 7. 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
  8. 8. 0 10 20 30 40 50 60 2010 2011 2012 2013 2014 Paid search Display Classified Source: ZenithOpen Market overview
  9. 9. Advertisers Users Market overview
  10. 10. A U Zero-price consraint Auction bidding: Generalized Second-Price Market overview
  11. 11. A U ~ Single-homing ~ Multi-homing Market overview
  12. 12. Market overview Production costs Switching costs
  13. 13. Market overview Production costs Switching costs −− Highly specific fixed costs −− Negligible variable costs −− Sunk
  14. 14. 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
  15. 15. Market overview Production costs Switching costs High Low−− Highly specific fixed costs −− Negligible variable costs −− Sunk
  16. 16. Market overview −− One click away Production costs Switching costs High Low−− Highly specific fixed costs −− Negligible variable costs −− Sunk −− Credence good
  17. 17. Market overview −− One click away Production costs Switching costs High Low−− Highly specific fixed costs −− Negligible variable costs −− Sunk −− Credence good Network externalities
  18. 18. 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
  19. 19. 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
  20. 20. Market overview Google Yahoo! Bing Other UK France Germany Ireland Italy Spain Digital 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%
  21. 21. European Commission Market Overview Positive effects Negative effects Post-transaction analysis Conclusion
  22. 22. Microsoft Yahoo! −− Economies of scale −− Reduction of costs Positive effects
  23. 23. Microsoft Yahoo! −− Economies of scale −− Reduction of costs −− Rationalisation of operational costs −− Stronger competitor to Google −− Greater value to advertisors Positive effects
  24. 24. European Commission Market overview Positive effects Negative effects Post-transaction analysis Conclusion
  25. 25. Merger Advertisers Users Publishers Distributors
  26. 26. Merger Advertisers
  27. 27. Merger Advertisers −− Increased cost per click (CPC) −− increased bidder density for particular keywords
  28. 28. Merger Users
  29. 29. Merger Users −− reduction of variety of choice −− degradation of organic search −− unilateral effect
  30. 30. Merger Publishers
  31. 31. Merger Publishers −− increased competition among publishers −− reduced competition between the remaining advertising platforms −− lower prices paid for publishers’ web space
  32. 32. Merger Distributors
  33. 33. Merger Distributors −− reduced competition between search platforms for distribution agreements −− increased Microsoft’s ability to leverage its market power in areas other than online advertising
  34. 34. European Commission Market overview Positive effects Negative effects Post-transaction analysis Conclusion
  35. 35. 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
  36. 36. Post-transaction analysis 10% 13% 22% 37% -10% 14% -20% -10% 0% 10% 20% 30% 40% Impressions Clickthrough Rate 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
  37. 37. 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.
  38. 38. 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.
  39. 39. 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.
  40. 40. European Commission Market overview Positive effects Negative effects Post-transaction analysis Conclusion
  41. 41. Discussion
  42. 42. References Photography of Microsoft Office by Jeff Wong, www.jeffwongdesign.com/2013/10/microsoft-office-interior

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