There are a number of ways to view the proposed Microsoft takeover of Yahoo. And, frankly, none of them is very encouraging. Yahoo is a company on a very slippery downhill slope, one that saw the company announce last week that it was to chop 1000 jobs in an effort to restore profitability. Microsoft is a company desperate to shore up the gaping hole in its business that is the Internet. And Google? Well Google just carries on being Google and growing stronger and stronger by the day. The concern, however, is that between the three the online advertising market is pretty much locked up and this deal will ensure it is even more so.

First, the Google perspective. In a posting on the official Google blog, chief legal officer David Drummond writes:

This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation. Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies — and then leverage its dominance into new, adjacent markets.

Which is indeed a concern. Microsoft’s ongoing EU battles are testament to the Redmond software giant’s habit of making its own proprietary rules to lock users into their systems. With a foothold in Yahoo, and access to a significant portion of Internet users, that Microsoft will try to do the same to the Internet as it has to PCs, is not unlikely. But, to be fair, Google is also glossing over some of the real issues here.

For Microsoft the deal smacks of the desperation the company is increasingly showing. It has long dominated the operating system space but is increasingly under threat from other OS players in the market such as Linux and Mac OSX. On the Internet, Microsoft has never been particularly successful, despite various attempts with the likes of MSN, MicrosoftLive and its Live search engine. And while it struggles to develop a coherent online strategy Google just gets bigger.

A bid for Yahoo doesn’t make a lot sense for Microsoft, even though the company argues that it will save billions in new efficiencies as a result of having access to Yahoo. Interestingly, the Microsoft is not arguing that the deal will result in greater revenues, rather that it will save a tidy amount in the tie up.

One of the concerns from a Microsoft perspective is how the integration of Yahoo will occur. This is likely to be a lengthy and complicated process, and one that will be, above all, exceptionally costly. The chances of a successful integration of the two companies is very likely to produce more failures than successes. If I were a Microsoft investor (which I am not) I would be shouting loudly right now that Microsoft should rather spend the time improving its latest operating system, Vista, than trying to defy the odds in an Internet takeover. Vista was meant to be Microsoft’s flagship product but has been mired in unfavourable press since its launch. Ignoring that doesn’t make a lot of business sense.

Real threat

The real threat behind the Microsoft-Yahoo deal, however, is not so much whether Microsoft will try to lock the Internet in a proprietary straight jacket but rather what the deal will mean for online advertising.

Microsoft and Yahoo together control an estimated 20-24 percent of the global search advertising market and 30 per cent of the online display market, according to an FT source. Google, in turn, controls an estimated 70 percent of search advertising and as much as 45 percent of online display advertising.

It is this aspect of the deal that is most likely to attract the attention of competition authorities. Together the three companies control almost all online advertising. A tie-up between Microsoft and Yahoo will only serve to control the market even more.

Of course Google has been noticeably quiet on this issue, restricting its complaint to the possibility of Microsoft locking up the Internet. Perhaps this is because it doesn’t want to re-raise the debate on its purchase of advertising platform DoubleClick. US competition authorities have already given the deal the go-ahead but European authorities are only expected to make a ruling this month or next. Highlighting the rapidly declining competition in the advertising space is not in Google’s interest right now.