Microsoft-Yahoo? Don't Bet On It

Though the combination would be a formidable opponent to Google, company sources say merger reports are based on talks a few months ago

by Robert Hof and Jay Greene

On paper, a merger of Microsoft and Yahoo! looks like the perfect foil to the seemingly unstoppable momentum of Google. Combined, the software giant and the online media titan would have easily the largest audience on the Web, a far more potent advertising engine, and finally, a credible position in the all-important Internet search market.

For those reasons, reports on May 4 that Microsoft (MSFT) and Yahoo (YHOO) are discussing a merger or wide-ranging deal made some sense, especially to the investors who swarmed over Yahoo's shares early in the day. But as was the case with repeated rumors of a Microsoft-Yahoo merger over the past few years, the prospects of a deal look unlikely. It now appears that the reports in the New York Post and The Wall Street Journal were based on talks that happened months ago.

Both Microsoft and Yahoo declined to comment publicly. But a Microsoft source in a position to know about talks told BusinessWeek that there are no current discussions of any significance. Another source close to the situation also indicates that talks are not current.

A Real Alternative

So why all the new excitement about a potential deal? Mainly because a merger or even an extensive partnership would touch off an epic battle for the top position on the Internet. Microsoft and Yahoo together would present the only real alternative to Google in an online world that increasingly resembles the Microsoft-dominated computer software business.

For the past couple of years, Google has romped across the Internet. It has used an increasingly dominant position in search, and the diminutive text ads that appear with search results, to rocket to $10.6 billion in sales last year, up 73% from 2005. And with an estimated quarter of all online advertising already in its pocket, Google has begun experimenting with ads in print, radio, and television.

All that has left many people from media moguls to big advertisers fearful that the company, with a market value of $147 billion, would usurp their businesses and exert outsize control of the rapidly evolving advertising world. Especially with last October's $1.7 billion acquisition of the video-sharing site YouTube and last month's $3.1 billion DoubleClick purchase, advertisers, agencies, and rival Internet outfits have worried that Google would become all powerful online (see BusinessWeek.com, 4/9/07, "Is Google Too Powerful?").

Appealing Ad Alternative

So no small number of players in the industry are rooting for the counterbalance that a Microsoft-Yahoo alliance would create. "It would create a new gorilla in the advertising arena, a super-portal," says Jim Lanzone, CEO of Ask, the search unit of IAC/InterActiveCorp (IACI).

Some Microsoft businesses would benefit from a combination with Yahoo. Neither Microsoft's MSN Web portal, which commands only 10% of online display ad impressions to Yahoo's 48%, nor its AdCenter search ad system, has caught fire. Yahoo's dominance in online display ads, as well as its well-received Panama search advertising system, introduced in February, would give Microsoft's ad efforts a leg up.

For its part, Yahoo has also been struggling to contend with the Google juggernaut. Despite its dominance in display ads, Yahoo now has only 22% of the search market to Google's 54%. And search ads count for nearly all the growth in the online ad business in recent years. The combined entities' search service might attract both more consumers and more advertisers. "Microsoft and Yahoo combined would be a more formidable force against Google," says Ryan Jacob, portfolio manager with Jacob Internet Fund, which counts Yahoo shares as 4.3% of its portfolio.

Fearsome Management Challenge

The biggest prize for the combined companies might be just the thing that sets Google apart: more data on customer intentions. Much of Google's success with search ads stems from its ability to divine customers' buying intentions, so it can show them the most relevant ads and then charge advertisers more for the service. Combining customer data from both Microsoft and Yahoo potentially could close some of the gap with Google.

For all that, the reasons not to do a deal remain stronger than the reasons to do it, according to some observers. For one, combining the companies would be a fearsome management challenge. They're in different states, they have many overlapping services bound to spur turf battles, and Yahoo's Silicon Valley culture retains some enmity toward Microsoft.

Consolidating those operations could take two years or more, by several accounts. "It will cause them to fall behind 18 to 24 months," says Samir Patel, CEO of SearchForce, a search marketing software firm in San Mateo, Calif. "I don't see a compelling reason for Yahoo to do it," adds Charlene Li, an analyst with Forrester Research (FORR). "It would be a nightmare. The memories of Time Warner-AOL (TWX) come to mind."

Slight Savings and Synergy

What's more, the imperative of a deal doesn't appear quite as urgent for Yahoo in particular. Company officials and some others in the company, in fact, have been more optimistic of late, thanks to Panama and some recent wins, such as a deal last month to provide ads for Viacom's (VIA) Web sites and the Apr. 30 purchase of online ad exchange Right Media. "You wouldn't have done that if you were going to sell the company in three or four days," notes Ellen Siminoff, CEO of search marketing firm Efficient Frontier and a former Yahoo executive.

Even for Microsoft, the reasons for a deal look iffy on a closer inspection. To keep Yahoo users, Microsoft wouldn't want to change the branding, but that means savings and synergy could be slight. What's more, there's "almost 100% overlap" in their respective online services, says Charles Di Bona II, senior research analyst at Sanford C. Bernstein, from search services and search ad systems to e-mail and news. "The Googleplex visitor parking lot would be full the day after this deal closes," Di Bona says. "There are all sorts of ways these guys don't fit together."

That said, a less sweeping deal, combining search or advertising efforts, might benefit both companies without unduly burdening them with massive integration issues. "I see partnerships happening more than a merger," says Li.

For what it's worth, Yahoo executives also have indicated they prefer to set their own course. "We're not going to compete with Google by trying to be Google," Jeff Weiner, executive vice-president of Yahoo's Network Div., which comprises its consumer Web properties, told BusinessWeek in mid-April. "We'll compete by being Yahoo." The right price might change those intentions, of course. But for the time being, Yahoo apparently will remain just Yahoo.

Hof is BusinessWeek's Silicon Valley bureau chief. Greene is BusinessWeek's Seattle bureau chief.

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Let the Phone Pick Up the Tab

Imagine having your very own mobile ATM—otherwise known as your cell phone—in the palm of your hand

by Olga Kharif (BusinessWeek)

Cheryl Bussani's son was grown up enough to move out of their Daly City (Calif.) home into his own place. But he still needed the occasional quick infusion of cash, and his new home in Pacifica, Calif., was far enough away that it wasn't convenient for Bussani to just drive over and drop off a few dollars. "It wasn't worth the gas," she explains.

So Bussani makes loans to her son via cell phone. She uses a service provided by Obopay, in Redwood City, Calif., that lets her transfer funds by dialing a few numbers on her wireless handset. The professional housecleaner also collects her own payments and pays bills with the service.

Bussani is part of the vanguard of U.S. mobile-phone subscribers who are doing their banking with wireless handsets. The practice is expected to gain traction in a matter of months when the likes of bigger, more established companies including banking powerhouse Citigroup (C) and wireless behemoth AT&T (T) kick off ad campaigns extolling the low cost and high convenience of paying over a mobile phone.

Following the Money

They may have a point on price. EBay's (EBAY) PayPal Mobile, which lets people wire funds and donate to charity through a phone, is free for many transactions. Obopay charges 10¢ to send money (see BusinessWeek.com, 5/14/07, "Souping Up Your Cell Phone"); contrast that with Western Union (WU), which charges 11% for transfers within the U.S.

And there's reason to expect mobile-phone payments will become easier. While some early versions require a software download onto a phone, AT&T will begin including software on devices in the fourth quarter. Cell-phone makers like Nokia (NOK) and Kyocera, along with Visa and MasterCard (MA), are trialing phones with embedded chips that allow for contactless payments. Simply wave your phone in front of a reader to pay for purchases. That should cut checkout time by 50% to 70%, studies have found.

By 2012, 292 million phones sold worldwide will contain these so-called near-field communications chips, according to consultancy ABI Research. "Consumers tell us they are ready," says Pam Zuercher, vice-president of product innovation and coordination for Visa USA. The credit card association's March survey of 800 U.S. consumers showed that 57% would be interested in buying such a phone. And among 18- to 42-year-olds, 64% said they'd switch wireless carriers for it. "We believe mobile banking will be one of the bigger applications," says Greg Latour, senior vice-president of technology development at wireless carrier Cellular South, which, like carriers Amp'd Mobile and Helio, already offers Obopay.

Fee-for-All

If optimists like Latour are right—and considering the success of contactless payments in places such as Korea, there's reason to think they will be—the increased reliance on mobile payments is likely to have a ripple effect on financial services. Wireless service providers will demand their cut of financial transaction fees. Mobile payments are also expected to crimp demand for cash and checks, which still account for more than half of all consumer purchases.

At stake is $1.4 trillion in small payments of under $25 made in the U.S. each year. By 2010, about 10%, or $140 billion, of all payments under $25 will be made with contactless cards, estimates Dan Schatt, an analyst with consultancy Celent. Of those, 10% could be paid with mobile phones, he estimates.

Established players such as Visa, MasterCard, and First Data (FDC) will continue to angle for the business of processing payments and the right to collect the fees that amount to as much as 2% of purchases. But use of checks, printed by companies such as John H. Harland, could be affected. So could demand for ATMs, run by companies like First Data, recently purchased by an affiliate of private equity firm Kohlberg Kravis Roberts for $29 billion, Schatt says.

Plenty of Players

A number of upstarts stand to benefit. Schatt lists companies like Gemalto, which makes Smart Cards for contactless payments. Companies such as Atlanta-based Firethorn and Sausalito (Calif.)-based mFoundry, which power mobile banking and payments applications could profit from this move. So could outfits like ViVOtech, which sell related hardware such as in-store scanners. "We can get a bank up and running [on mobile phones] in six weeks," says Drew Sievers, co-founder and CEO of mFoundry.

Wireless service providers tend to keep tight reins on the applications they give users access to, and they will want a share of the transaction fees. Yet, unlike such carriers as Japan's NTT DoCoMo, U.S. wireless service providers are expected to stop short of offering financial services on their own. "We don't see any operators we deal with even considering this strategy," says Tripp Rackley, CEO of Firethorn.

And, of course, the service providers themselves could gain handsomely. Obopay is making a push with funding from investors like wireless powerhouse Qualcomm (QCOM). Web giants like Google (GOOG), already offering payment services online through Google Checkout, could potentially enter the fray. Cell-phone makers like Nokia could step into the market as well.

Spend-shifters

To prevent any business disruptions, processors have been among the first to jump into mobile payments. First Data doesn't see mobile payments as a threat: "We see it more as an extension of consumer choice," says Brian Friedman, vice-president of innovation for First Data financial institution services. It's not taking chances, though, and is ramping up mobile efforts. On May 2, First Data invested in ViVOtech and has committed to using the startup's hardware in offering contactless payments.

Visa and MasterCard are conducting near-field communications trials. Visa, for one, has developed its own mobile payments software. "Today, $17 of every $100 of spend is spent on a Visa card," says Visa USA's Zuercher. "We are looking at mobile as a way to shift [even more of this] spend." To that end, the company will be adding more capabilities, such as person-to-person money transfers and ticket purchases, later this year. Visa is also trying to address issues such as ease-of-use and security, which plague contactless payments in other countries (see BusinessWeek.com, 11/21/06, "Contactless Payment Comes to Cell Phones").

And banks aren't sitting still. Citibank, for instance, is piloting Obopay with select customers. It's also trialing near-field communications in New York with Nokia and Cingular/AT&T. And then there's Citi Mobile, launched in April in California and expected to roll out nationwide by the end of May. Based on software from mFoundry, the service lets users search for ATM and branch locations, reach customer service, and check balances. "The uptake is within our expectations," says Steve Keitz, Citi Mobile Director. "We think this is the next step."

Kharif is a reporter for BusinessWeek.com in Portland, Ore.

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'Brandjacking' on the Web

Technology May 1, 2007, 12:01AM EST

A new study by MarkMonitor finds that cybersquatting and other abuses against big companies with well-known brands are on the rise

by Arik Hesseldahl (BusinessWeek)

If ever there were two companies with more different lines of business, they would have to be InterContinental Hotel Group and World Wrestling Entertainment.

Both are the corporate parent of household names. WWE (WWE) is the $400 million (fiscal 2006 sales) producer of professional wrestling exhibitions and TV shows like Smackdown whose stable of stars includes Undertaker, Chris Benoit, and Rey Mysterio. InterContinental (IHG) is the Britain-based $1.9 billion (2006 sales) hotelier, which owns such storied brands as Holiday Inn and Crowne Plaza.

What these two markedly different companies have in common is a problem protecting their brands from abuse on the Web. From domain names that use trademarked words and phrases to direct users to sites with no connection to the company, to selling counterfeit goods on auction sites like eBay (EBAY), the cases of WWE and InterContinental illustrate how widely well-known brands are being exploited online, and how combating the problem is turning out to be a huge challenge.

A new study released Apr. 30 from MarkMonitor, a privately held firm that alerts companies if their brand is being abused online, has put some hard numbers on the scale of the problem. Using the top 25 companies on the Interbrand 100 list of most valuable brands, which includes names like Coca-Cola (KO), Microsoft (MSFT), Disney (DIS), Citibank (C), Google (GOOG), and Dell (DELL) (see BusinessWeek.com, "The 100 Top Brands 2006"), the San Francisco outfit found that brand abuse on the Web is greater than previously thought.

Microsoft on the Warpath

The biggest problem for the companies, at least given the overall number of incidents, is cybersquatting. It's the unauthorized use of a trademarked name or phrase in a Web domain pointing to a Web site that isn't owned by the trademark holder. MarkMonitor found more than 286,000 instances of cybersquatting for the 25 brands it studied—an average of 11,400 instances each. The data was collected during a four-week period starting Mar. 9 and ending Apr. 6 and was averaged over that period. If MarkMonitor's numbers, collected in what it has dubbed "The Brandjacking Index," are on the money, the scale of the problem alone is astonishing.

If a figure equal to more than 11,000 incidents per company on average seems high, then consider the case of Microsoft, one of the companies in MarkMonitor's sample group. It has been particularly active in suing people it says have been using domain squatting to infringe on its trademarks. It currently has four federal lawsuits pending and recently settled two others in the U.S. against companies it says have registered domain names that are close to Microsoft trademarks, such as 1microsoft67.info or freehotmail.net. In recent months it has reclaimed more than 1,000 different domain names. In Britain, it has five similar legal actions pending and recently settled another with a company that had registered as many as 6,000 different domain names that contained variations on Microsoft trademarks.

Clearly, cybersquatting is on the rise, and so are the number of domain-name registration disputes. The World Intellectual Property Organization, the global body that arbitrates such disputes, says its caseload jumped by 25% in 2006. Even so, it received only 1,823 complaints last year, the highest since 2000. That number suggests that WIPO in an entire year is likely to receive complaints on less than 1% of the domains hijacked in a single four-week span tracked by MarkMonitor. Certainly many disputes can be resolved without going to WIPO. Lawyers can often shut down a site using a hijacked name by sending a cease-and-desist letter, while other parties may not even know their trademarks are being used.

The Fans Weigh In

MarkMonitor gathered the data for the study in the course of monitoring Internet brand abuse as a service. Among other things, it checks 134 million domain-name records every day using its own software and search algorithms, and closely watches filings with the U.S. Patent & Trademark Office for evidence of trademark abuse. (The company declined to disclose how much it charges for that service.)

Cybersquatting is just one of the problems that faced Stacy Papachristos, a lawyer at WWE's headquarters in Stamford, Conn. "We first heard about it from our fans," Papachristos says. "They'd write us pointing out Web sites that weren't affiliated with us, but which were using our names to make money on their own products."

In one recent decision from WIPO issued on Mar. 5, WWE was able to shut down several Web sites using its trademarks with domain names like smackdownmagazine.com, wwemagazine.com, and wwebackstage.com. They pointed not to Web sites produced by the company but to sites operated by a company called DIR Enterprises, which was giving tips about how to get backstage at pro wrestling events and plans for building a wrestling ring.

Other Headaches for Companies

DIR had registered the domain names days or weeks before WWE had formally changed its name from World Wrestling Federation to World Wrestling Entertainment and registered all the required trademarks (see BusinessWeek.com, 2/2/04, "Is the WWE Rousing Itself from the Mat?"). "They were using our trademarks to draw wrestling fans to their sites," Papachristos says. In a case argued before WIPO, the domain names were reassigned to WWE. DIR Enterprises did not respond to an e-mail seeking comment.

Cybersquatting is only the biggest in a huge array of trademark abuses that MarkMonitor says is growing into big business. The study found more than 300,000 separate instances of brand abuse online (including cybersquatting and other offenses) against the 25 companies in the sample group.

Next on the list after cybersquatting is domain "kiting." This practice exploits a loophole in rules set down by the Internet Corporation for Assigned Names & Numbers (ICANN), which oversees domain-name registrations. Computer software can automate the process of registering a domain for the five-day trial period allowed under ICANN policies. The registration can then be renewed for another five days over and over again, usually under some cover of anonymity, making resolution of the problem difficult. This has created an environment that gives corporations with lots of trademarks to protect a huge headache. In a statement on the problem issued in March, WIPO's deputy director general, Francis Gurry, warned that the current environment of easy domain registrations has "fostered practices which threaten the interests of trademark owners and cause consumer confusion."

No Real Overhead Cost

Shifts in the news and in the time of year can have a big effect on what domains are hijacked. When a lot of media attention was being given to the possibility of an avian flu epidemic, there was a huge upsurge in domain registrations using Tamiflu, the trademarked name of an anti-flu treatment owned by Roche Laboratories. WIPO heard 34 cases involving 64 different domain names related to some variation of the Tamiflu name.

MarkMonitor's study found more than 11,000 cases of domain kiting carried out against the 25 companies in the sample group. One big target of kiting efforts is financial institutions, which accounted for 980 incidents of kiting attacks carried out among the sample group.

Why is kiting suddenly popular? MarkMonitor Chief Marketing Officer Fred Felman says it makes money for those engaging in the abuse. Since the five-day trial period for a Web site registration is free, there's no real overhead cost. At least 1 million hijacked sites are reregistered every day, used to create "pay-per-click" sites that can yield as little as $25 per year. But take that million sites and pretty soon you're looking at a business model that could potentially generate $125 million per year. "We think kiting and domain 'tasting' represent more than 90% of the new Internet domain registrations on a daily basis," he says. "We're talking about people who exist out on the fringe of the legitimate business world," Felman says. "But they're people making real money off of exploiting these brands, probably enough to pay the rent and get a nice car."

Not Just a Problem for Consumers

And then there's e-mail phishing. This is the practice of using e-mail to entice unsuspecting consumers to click through a link to a Web site that may look as if it's operated by their bank or another financial institution. Typically, a phishing e-mail informs the consumer that his bank needs him to "change your password right away." Thinking the message is legitimate, consumers click through, type in their account information and password, and soon learn the hard way that the message they received didn't really come from their bank at all.

While it's a big problem for consumers, it can also be a major problem for the banks or brokerage firms whose brands are used to carry out the crime. Phishing e-mails accounted for 16 million e-mails sent per day during MarkMonitor's sample period, up 104% in the first quarter of 2007, vs. the same period in 2006. Felman says 229 companies were the targets of phishing, and more than half of those were targeted for the first time. Banks, credit unions, PayPal (eBay's payment service), and even the Internal Revenue Service have seen their names used in phishing campaigns.

Capitalizing on Consumer Confusion

Phishing is clearly on the rise. A study by the Anti-Phishing Working Group found that the number of unique Web sites devoted to phishing jumped to just more than 16,000 by February, 2007, from 10,091 in August, 2006. "The problem is definitely not getting better," says Dan Hubbard, vice-president of security research at Websense (WBSN), which shares its phishing data with the anti-phishing group.

Another reason for the surge in phishing comes from simple consumer confusion. "We believe a lot of it is due to the confusion people have over the introduction of new security methods that banks introduce," he says. "Plus, there's been a lot of mergers and acquisitions of different banks. The customer is dealing with a new entity and that creates some confusion that phishers can use to their advantage."

Keeping a close watch on your brand is something every company with online operations has to do, says Del Ross, head of brand distribution and marketing for InterContinental, the hotel chain. "It's cheaper to spend the money to protect your brands than not to protect them," says Ross. "Just about everyone with a brand to protect has or will have this problem, and it's going to get worse."

Hesseldahl is a reporter for BusinessWeek.com.

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U.S. Agency Revenue Jumps 8.8% to $28.2 Billion

from Advertising Age - News by bjohnson@adage.com

CHICAGO (AdAge.com) -- Revenue for U.S. marketing-communications agencies jumped 8.8% to $28.2 billion in 2006, the strongest growth since ad spending began to rebound from recession in 2002. The hot growth came from marketing services, fueled by digital. Traditional ad agencies, grappling with a shift from old media, saw tepid growth.

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Starbucks' Pushy New Neighbor

from Advertising Age - Digital by bbulik@adage.com

A small Spanish start-up named Fon is becoming a big issue for Starbucks. And Fon doesn't even sell coffee. In late February, the wireless-community builder launched a marketing campaign called "Fonbucks," giving away Wi-Fi routers to Starbucks' neighbors around the country. The idea was to get Fon routers close to Starbucks customers trying to connect to a wireless network, giving them a choice between $2-a-day Fon Wi-Fi access or $10 Starbucks T-Mobile access.

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