Microsoft's Trojan Horse (Also Google's): Display Advertising

So while all the attention on who Microsoft is hunting next–after its latest parry at grabbing Yahoo’s search business was foiled once again–has settled on Time Warner’s AOL (see BoomTown’s post on that interest from Monday), it would be a mistake to assume that the software giant is not still aiming directly at Yahoo.

Why?

Because it must, and not only for the reason–to get control of its Yahoo’s #2 search business–that has been much focused on.

It’s also Yahoo’s (YHOO) strong display advertising business that Microsoft (MSFT) is clearly after.

It has been obvious that Microsoft needs to get hold of Yahoo’s search market share to even begin to compete with its archrival Google (GOOG) in the Web’s goose-that-laid-the-golden-egg search business.

But the future hope, according to numerous sources within the company, is to gain a foothold at Yahoo in order to someday take over its much more impressive and potentially more lucrative online display business, which includes ads like banners.

“This is not just about search,” said one source. “It is about scale in all aspects of a market that is going to be gigantic.”

In a way, it’s a reliable old Trojan Horse strategy, getting into Yahoo’s house in search and then moving onto display, an arena which many think will be the real moneymaker in the years ahead.

Right now, search rules in the online ad business, which totaled $21.2 billion in 2007, according to the Interactive Advertising Bureau.

Search advertising, which Google completely dominates, with Yahoo second and Microsoft third, accounts for 41 percent of that total.

Display accounts for 34 percent. In this space, Yahoo is king, while Google has been a minor player, despite its recent purchase of DoubleClick. Microsoft has been trying to muscle its way in too.

Many think the scaling and targeting technologies that are developing and that Google or Microsoft certainly can bring to the table–combined with the relationship business for which Yahoo is famous–is the next killer app to make display dominate.

Google, though it is trying to downplay its overall power of late, is aiming hard at doing in display what it has done in search, especially trying to use its powerful technology skills.

“We really feel we’re in a position to become the world’s largest display ads provider,” said Google’s SVP Jonathan Rosenberg in its first-quarter earnings call in April.

Obviously, Microsoft’s efforts in this arena would be greatly helped by being tightly integrated into Yahoo’s search business first.

So, while AOL’s (TWX) Platform A ad business is also attractive, it still only sits in the middle of the online ad food chain.

That’s why Microsoft is not likely to take its eyes off the real prize: Yahoo’s much tastier high-end display business.

Please see this disclosure related to me and Google.