Online Advertising: Allied Against Google!

How many global internet firms does it take to challenge Google in the online advertising industry nowadays?

The answer, apparently, is three: Microsoft, AOL, and Yahoo. Although no formal agreement has yet been announced by the three firms, credible news organizations reported last week that the trio had agreed to coordinate their efforts to sell advertising space on their web pages.

Google, meanwhile, has chosen not to respond to the reports, preferring to maintain its focus on challenges like the positioning of its Android mobile telephone franchise against Apple’s iPhone. That says something about how the once-dominant market positions of the three partners have waned, doesn’t it?

They Once Were Giants

Microsoft, AOL, and Yahoo, of course, exemplified the growth of the contemporary knowledge economy during each of the final three decades of the twentieth century. Each firm revolutionized an existing technology and then found a way to profit from it, eventually yielding to the next firm in line, which then accomplished a progressively similar feat.

Microsoft was the first in line in this series, incorporated in 1975 by the now-legendary development team of Bill Gates and Paul Allen. The men modified the operating system DOS, which had previously been created by a firm named Digital Research, to operate IBM’s emerging line of Personal Computers (PCs). Later, they introduced the groundbreaking Windows line of operating systems to the world.

But despite its dominance of the desktop computer operating systems sector, Microsoft was never able to dominate the internet age that emerged during the 1980s. That accomplishment was achieved by Steve Case of America Online (now AOL), originally incorporated in 1983 under the name Control Video Corporation. The firm dominated the Internet Service Provider (ISP) business at a time when the vast majority of all Americans accessed the web through dial-up telephone lines that were connected to their PCs, at the dawn of the internet age.

Later, in 1994, Stanford University engineering students Jerry Yang and David Filo launched the Yahoo site as a reference tool, one that was designed to help web surfers find information once they were connected to the internet. Their portfolio of virtual services soon diversified into search engine, email, and other functions, which eventually grew into the most highly trafficked collection of web sites in the world. Even today, Yahoo holds the #2 position (behind Google, of course) in web traffic in the United States.

Each of these three firms thus arose to enhance and then supplant the innovations of the previous firm. None, though, possess a successful track record for establishing mutually profitable joint ventures with other organizations, which is why some analysts are dubious about their prospects for success in their newly announced three way partnership.

Failed Relationships

Those skeptical analysts, in fact, can point to any number of instances in which the three firms have fallen out of joint business relationships with other prominent organizations. Microsoft’s original business relationship with IBM, for instance, ended with angry recriminations and subsequent retaliatory attempts by IBM to establish its own operating system and productivity suite to rival Windows and Office. And the NBC television network’s MSNBC cable channel still carries an acronym within its name that memorializes its original failed plan to jointly operate the news service with Microsoft.

Meanwhile, AOL’s merger with Time Warner continues to be universally regarded as one of the greatest fiascos in the history of corporate mergers. Consummated at the very height of the internet bubble economy in the millennial year 2000, the AOL half of the merged entity later collapsed in value and was fully jettisoned (i.e. spun off) by the firm in 2009. More recently, AOL’s recent acquisition of the highly successful Huffington Post is reportedly confronting similar challenges.

Finally, Yahoo was recently embroiled in a complex ownership dispute with Alibaba of China, an organization in which it owns a 40% interest. Some believe that the stake represents Yahoo’s most valuable strategic asset, but earlier this year Yahoo charged that Alibaba’s Board spun off its Alipay subsidiary without seeking its advance approval. Although the disagreement has since been settled, the public argument was described by some as having reached “soap opera proportions.”

Why would these three firms, with so many resources at their (individual) disposal and so little successful experience in collaborative joint ventures, try to pull off a three way venture against a far more accomplished rival? It is, indeed, difficult to avoid the conclusion that the three firms have reached a level of desperation where no alternative options are feasible.

In the meantime, the historical cycle of innovation and evolution continues, with Facebook having launched in 2004 as a pioneer of the social networking revolution, and with fledgling location based services such as foursquare now hoping to become the success stories of the upcoming decade. It is indeed difficult to image how AOL, Microsoft, and Yahoo, working together or independently, will be able to succeed against the inexorable tide of history.