The search alliance between Yahoo (
) and Microsoft (
) could boost average search ad rates by 78% measured on a
according to a recent study by digital media
services company GroupM
The study also predicts that long-term CPC rates will stabilize
at 13% to 23% above current levels.The higher rates would reflect
the fact that the alliance gives advertisers a bigger search
platform to reach consumers.
Yahoo and Microsoft announced their search alliance in July
2009. It received the necessary regulatory approvals early this
year. According to the terms of the 10-year deal, Yahoo will use
Microsoft search technology for search, while receiving 88% of
search revenues generated through its own sites during the first
If the GroupM study is right, we see a potential 2% upside to
$19.04 stock price estimate for Yahoo's stock
, We see negligible upside to our
$28.06 price estimate for Microsoft
. Our analysis follows below.
Impact on Yahoo and Microsoft stock
We estimate that search advertising constitutes 21% of Yahoo's
stock value, versus 1% of Microsoft's stock. Hence Yahoo
shareholders stand to gain the most from rising search ad rates.
For its part, Microsoft hopes to leverage the increased search
market share that it gained from allying with Yahoo to compete
effectively against Google (
). Google is the overwhelming leader in the search advertising
market with a global share of 65%, versus 10.4% for Yahoo and 9%
We expect Yahoo's revenue per search, a key metric in the online
advertising industry, to rise modestly during the Trefis forecast
period, from $20.60 per 1,000 searches in 2009 to around
$21.20 per 1,000 searches by 2016. (Revenue per search equals
cost-per-click times the click-through rate.) You can drag the
trend-line in the chart below to create your own revenue-per-search
forecast for Yahoo and see how it impacts the company's estimated
If GroupM's predictions pan out, Yahoo's average CPC rates could
increase by 11% to 20%. In this scenario, Yahoo's average revenue
per search could reach $24 or even $26 by 2016, instead of the
$21.60 that we currently forecast. This scenario suggests an upside
of between 2% to 4% to Yahoo's stock.
Applying the same assumptions to Microsoft's search business
yields little or no upside for the stock, primarily because search
contributes a tiny share of Microsoft's total revenues.
You can see the complete $19.04 Trefis Price
estimate for Yahoo's stock here.
You can see the complete $28.06 Trefis
Price estimate for Microsoft's stock here.