For the first time in four years, Google Inc is feeling the heat of potential competition in the proposed combination of Microsoft Corp and Yahoo! Inc.

Microsoft’s $44.6 billion bid for Yahoo may slam another door in Google’s so far unsuccessful attempt to expand beyond the four-line text advertisements that run alongside Internet search results. That’s because Microsoft and Yahoo would control more than a quarter of the market for animated ads and colourful display banners at the top of Web pages.

With growth slowing in the market for text ads, Google set its sights on display and multimedia ads, where total US sales will jump 60 per cent by 2011 to $13.7 billion, according to researcher EMarketer Inc Google has relied on search-linked ads for almost all of its $16.5 billion in annual sales and the sixfold increase in its stock since August 2004.

“Even though Google may be looking forward and seeing this world where they own online advertising, at this point they’re really only owning one flavour,” said Jon Gibs, Vice President at the research firm Nielsen Online in New York. “They really are going to be facing quite a giant in the other part of the display ad universe.”

Google shares have tumbled 11 per cent since Microsoft’s unsolicited bid for Yahoo on February 1, to the lowest since August, on concern the combination will curb growth. Quarterly profit for the Mountain View, California-based company also trailed analysts’ estimates.

Microsoft said it is pursuing Yahoo to challenge Google for online ad sales, a market that may double to $80 billion worldwide by 2011. In the US, search ads will account for 40 per cent of online promotions, compared with 33 per cent for display and media spots. Analysts predict display revenue will become at least as profitable as search ads and say it’s growing faster.

Failed efforts

Google has been the most-used site for Web searches since January 2004, based on Nielsen data. Chief Executive Officer Eric Schmidt has failed to parlay that dominance into new markets. He tried selling ads for radio and TV commercials, and newspaper classified spots.

With Yahoo slumping and Microsoft unable to jumpstart Web ad sales, it started to look as if Google might have an easy shot at up-and-coming parts of the Web: ads dished out to Internet pages shown on mobile phones and video promotions.

In addition to its popular homepage, Yahoo owns the Flickr photo-sharing site and HotJobs employment site. It attracts millions of users to its finance and sports pages. Those are locations for marketers to showcase their brands.

As of November, Yahoo had the biggest share of the US display market with 19 per cent, according to Reston, Virginia-based ComScore Inc. Microsoft was third with 6.7 per cent, behind News Corp’s Fox Interactive Media. Google had one per cent.

New leader

“When you put Yahoo and Microsoft together, what you get is a leader in display and branded advertising,”' said Jeffrey Donlon, who helps manage $18 billion at Manning & Napier Advisors Inc in Fairport, New York, including Microsoft and Google shares. “Yahoo brings some interesting content assets to the table that Google does not have.”

Yahoo hasn’t responded to Microsoft’s offer. Stanford Group Co analyst Clayton Moran in Boca Raton, Florida, said Yahoo may seek a partnership with Google or a media company like News Corp. Yahoo Chief Executive Officer Jerry Yang had told staff in an e-mail that the board is still examining the Microsoft bid and other “strategic alternatives.”

Yahoo’s board is carefully evaluating the Microsoft proposal, company spokeswoman Tracy Schmaler said.

Spokespeople Matt Furman at Google and Colleen Lacter at Microsoft declined to comment.

‘Troubling questions’

With display ads, Google can target Web users by placing banners and videos on other companies’ sites. In some cases, marketers pay for placement and in others they pay when an ad is clicked.

Google has made moves into display and multimedia ads, with the $1.65 billion acquisition of the video site YouTube Inc in 2006. Almost a third of all US online video clips are viewed on YouTube, and Google sells ads in some videos. Companies including retailer Neiman Marcus Group Inc and TV maker Royal Philips Electronics NV have rented out the YouTube homepage for a day.

Google followed by offering $3.1 billion for the display ad company DoubleClick Inc in April, and has introduced ads with multimedia clips that show movie trailers and live news.

The DoubleClick transaction is under review by European regulators. Microsoft opposes the deal, arguing it would give Google too much control of the Internet ad market.

No oxygen

Microsoft’s online revenue, mostly display ads, rose 38 per cent to $863 million last quarter. More than 80 per cent of Yahoo’s $7 billion in annual sales come from online ads, and its display revenue rose 20 per cent last quarter.

Google doesn’t give figures for the search and display ad businesses. Credit Suisse analyst Heath Terry in New York says display and YouTube will contribute a combined $323 million in sales this year, or 2 per cent of revenue, and will rise to $705 million, or 3 per cent, in 2009.

“They’re going to steal the oxygen from where Google is trying to grow,” said Bill Gossman, CEO of Revenue Science Inc, a New York-based provider of targeted advertising.

Source: Bloomberg