Ballmer: Yahoo would give Microsoft a 'consumer face' online

It would be a merger whose size and scope could only be rivaled by pharmaceutical companies earlier this decade. But Microsoft's objective now is to somehow convince everyone -- Yahoo's shareholders, its board, their combined customers, and let's not forget the trade regulators -- that the whole of the two companies will somehow be greater than the sum of all the other sums of their parts put together.

There are an inordinate number of questions arising from Microsoft's announced takeover bid of Yahoo, only a few of which financial analysts managed to successfully squeeze in this morning, during a conference call that was abruptly cut short at under a half-hour.

But one very important question did manage to emerge right away: Why would a company that had just recently succeeded in integrating new properties into its ad platform strategy -- including its $6 billion acquisition of aQuantive -- suddenly renew its interest in acquiring a competitor whose own ad platform might defeat the need to even own aQuantive in the first place?

"In a sense, there's three constituencies...and we need to continue to build critical mass with all three: consumers, advertisers, and publishers," Microsoft CEO Steve Ballmer began his answer.

But from there, his characterization of aQuantive's contribution to Microsoft versus the possible Yahoo contribution, became scaled in a way...scaled down.

"Our aQuantive acquisition was a great step forward, particularly with advertisers, but we also picked up some publisher assets that we like," Ballmer admitted. "Of course, there was no consumer face to that, and at the end of the day, the linkage, the critical mass is, consumers -> advertisers, advertisers -> publishers, publishers -> advertisers -> consumers, those all kind of mix together. And certainly from a consumer perspective, also from an advertiser perspective and a publisher perspective...there's no better way to increase scale and capacity than this acquisition."

Microsoft always coins a phrase -- or retroactively invents one -- whenever it's making a big new marketing push or an acquisition. Today was no different, as reporters were treated to "scale economics" as the justification Microsoft is offering for this deal. Rather than a synonym or rephrasing of "economies of scale," Microsoft used the term to refer to the relative size and service capacity of the major players in the search market with respect to each other.

In Microsoft's public letter to Yahoo's board of directors, it suggested, "This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers."

This morning, Microsoft's platforms and services division president Kevin Johnson, who oversees its MSN efforts, went into further detail on the theme of the day.

"There are a few key dynamics in the online advertising industry that I think are worth noting," remarked Johnson. "First, this is a business that has scale economics in a few key areas. Scale economics in search and ad serving, and scale economics in the capital needed to support these areas -- [capital expenditures] for data centers, servers, and infrastructure. Second, this is a business where technology matters. It's a software problem, where our engineering and R&D expertise in growing the capacity is really critical to the success related to achieving scale.

"Third, this is a business which requires significant investment in servers, data centers, and infrastructure to support the high-scale services," he continued, before invoking language whose irony transcended the context of even something as huge as today's announcement.

"Because of these dynamics -- scale economics, the technology driven nature of this industry, and the capital investment -- you see this industry going through a period of consolidation. Today, the market is increasingly dominated by one player. By combining assets of Microsoft and Yahoo, we can offer a more competitive choice for consumers, advertisers, and publishers. The fact is, the industry will be better served by having a more credible alternative in areas of search and advertising."

Next: That which survives