Microhoo May Drive Search Advertisers to Social Media

[picapp align=”left” wrap=”true” link=”term=microsoft+%2b+yahoo!&iid=5642738″ src=”a/6/d/e/Yahoo_And_Microsoft_1d31.jpg?adImageId=10613268&imageId=5642738″ width=”234″ height=”162″ /]The Microsoft and Yahoo! partnership may have unintended consequences for its search engine advertisers.

Last week, the companies won U.S. and European regulatory approval for their 10-year partnership. Under the deal, Yahoo! will use Microsoft’s Bing search engine to handle queries on its site, and sell ads next to the results.  Yahoo! entered the arrangement as a way to cut search-related costs, while the deal is intended to help Microsoft gain ground on Google, which controls about two-thirds of the U.S. search market.

Yahoo! has lost almost a fifth of its market share over the past year, while Bing has gained market share for eight straight months.

“Together, Microsoft and Yahoo will promote more choice, better value and greater innovation to our customers,” Microsoft Chief Executive Steve Ballmer said in a statement.

However, analysts say the two former rivals face a tough task combining their operations. “The challenge now lies in implementing the partnership so that the transition is smooth,” FBR Capital Markets analyst David Hilal wrote in a research note. “Any glitches could result in customers and partners diverting more of their business to Google.”

The justification for the partnership was to increase the level of competition among advertisers, boosting revenues for Yahoo! and Microsoft. Of course, those higher revenues will come at the expense of search engine advertisers since more competition for ad space will ultimately drive prices up.

So what’s the solution? Advertisers should start looking for more low cost options – particularly in social media, which has proven to be the cheapest way to reach a large number of people.

But if that happens, all the ballyhoo over Microhoo may wind up being much ado about nothing.