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Microsoft put a price Friday on its inability to keep pace with Google
in the race for dominance on the Web: $44.6 billion.

That's how much Microsoft offered for Yahoo in an attempt to compete
with Google, the Internet search king.

Tired of talking with Yahoo about a partnership, as it has over the
past 18 months, Microsoft instead initiated a surprise takeover bid
for the Web portal.

The size of the proposed cash-and-stock transaction puts Yahoo under
intense pressure to consider the offer, valued at $31 a share -- a
rich 62 percent premium over Yahoo's $19.18 closing price on Thursday.
Microsoft's offer was made public Friday before the markets opened.

A deal would usher in a new era of competition between Microsoft and
Google, the two biggest players of the digital age. They have been
battling each other across businesses and gobbling up other companies
as they try to one-up each other in an era of explosive growth in all
sectors of the Internet economy.

The fact that Microsoft is chasing Yahoo is an acknowledgment that it
couldn't catch up to Google, the online portal of choice for tens of
millions of computer users, who go online to do everything from watch
videos on Google's YouTube to look for a restaurant.

To attract the huge number of advertisers flocking online, Microsoft
recognized it needed a partner and wants Yahoo, the third titan of the
Internet age.

In a letter to Yahoo's board of directors Friday, Microsoft CEO Steve
Ballmer made it clear why the Redmond, Wash., software giant wants
Yahoo: online advertising is expected to double in the next three
years, from $40 billion to $80 billion.

"Today, the market is increasingly dominated by one player," Ballmer wrote.

Indeed, Google continues to separate itself from the pack.

Google's share of the U.S. Internet search market increased from
nearly 52 percent at the end of 2006 to more than 58 percent at the
end of 2007, according to ComScore figures. Meanwhile, Yahoo's search
share slipped from 28 percent to 23 percent, and Microsoft's fell to
under 10 percent during the same period.

So even though a combined Microsoft and Yahoo would still
significantly trail Google in search share, "a stronger No. 2 can gain
share," said Brian Bolan, an analyst who covers the tech giants for
Chicago's Jackson Securities.

That No. 2 also would have a single ad platform to help publishers
place ads across the Internet.

"The online advertising industry is an industry where scale matters,"
said Kevin Johnson, Microsoft's president for platform services,
during a conference call.

There is more to online advertising than search-based ads. Yahoo, for
instance, is the top Internet property based on display ad
impressions. These are the ads that are displayed on a Web site when a
page is opened. According to ComScore, it has a 19 percent share of
that market. The No. 2 competitor, with a 16 percent share, is Fox
Interactive Media, the owner of MySpace.com.

Ads across the Web

Yahoo, like Google and Microsoft, operates a network to place ads
across Web sites. Google's is the largest. Bolan thinks getting
Yahoo's ad platform is particularly attractive to Microsoft because of
the growing influence of social networking sites, such as MySpace and
Facebook. There, ads can be delivered based on a user's particular
interest.

"This is clearly the most valuable space on the Internet today and
continues to astound onlookers and participants alike with its
growth," Bolan wrote in a report.

Late last year, Microsoft invested $15 billion for a minor ownership
stake in Facebook and to serve as its partner in delivering ads to the
social networking site's booming audience.

Yet while it's clear Microsoft wants to bolster its Web presence,
Google is also proving to be the leader in other areas.

Later this year, mobile phones using a Google-based operating system
will start hitting the market, a threat to Microsoft's Windows Mobile
platform, which can be found on smart phones made by Samsung,
Motorola, LG and others.

"They are competing with everything Microsoft does," Bolan said of Google.

On Friday, Yahoo's shares rose $9.20, or 48 percent, to $28.38, while
Microsoft declined $2.15, or 6.6 percent, to $30.45. Microsoft's stock
drop was due in part to the public admition of defeat and perhaps to a
sentiment on Wall Street that it may need to raise its bid.

Bolan thinks $50 billion, or $35 a share, is possible.

The decision on whether to accept the Microsoft offer rests with
Yahoo's board of directors, which said in a statement Friday it is
evaluating the offer.

Nonetheless, sentiment was strong Friday that a pairing with Microsoft
would be wise for Yahoo.

"It's one plus one equals three for Microsoft and for Yahoo a very
graceful exit," said Zorik Gordon, chief executive of ReachLocal, an
Internet ad firm with offices in Chicago. It places ads for clients on
the ad networks for all three Internet players.

The potential deal would "create a more formidable competitor to
Google," Gordon said.

James Bilefield, the CEO for ad placement firm Openads and a former
Yahoo executive, said the pairing is "a logical fit and Yahoo needs to
do something dramatic."

But he's not so sure his clients, companies that place ads across
multiple networks, would benefit if a major player was removed.

"That means there could be less choice," he said.

Antitrust question

The Justice Department's antitrust division said it would look at the
deal if Yahoo accepted.

Bolan said he believes there is a "90 percent chance" this deal will go through.

"By going public with the bid, they have completely forced" the hand
of Yahoo's board. And while Yahoo CEO Jerry Yang has indicated
previously he is committed to turning around the company he founded,
"he also has fiduciary responsibility," Bolan said. "Shareholders may
be asking where else can I get that $31 a share?"

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