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Microhoo bid raised aloft; Google-Yahoo Kool-Aid quaffed. “No Mas” cried Ballmer’s Microsoft.

Yahoo drank the Google paid search Kool-Aid to fight off Microsoft, leading the Redmond giant to retract its higher bid to acquire the Sunnyvale search engine. Microsoft reportedly offered $33 a share, and Yahoo held fast at $37 a share. That was too rich for Steve Ballmer’s blood. The prospect of Yahoo outsourcing its paid search to Google was also too much for Ballmer to stomach.

So Microsoft walked. In a letter to Jerry Yang (full text below), Steve Ballmer cited Yahoo’s intention to outsource search as the primary reason he decided to scotch the deal.

Of course that doesn’t mean enraged Yahoo! shareholders won’t sue Yahoo.

Ballmer wrote, “I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.”

Here’s why, according to Microsoft’s business logic:

Advertisers would use Google rather than Yahoo! Panama to manage paid search, fragmenting not only PPC but display advertising and the Yahoo! advertising ecosystem.
Yahoo then wouldn’t be able to retain talented engineers working on advertising systems - engineers whom Ballmer considers a key aspect of Yahoo’s attractiveness.

The decision would also create a morass of regulatory and legal problems that no acquirer - especially Microsoft - would want to slog through. Ballmer believes search market share of the combined Yahooo-Google deal would reduce competition and advertiser choice.

Ballmer took the argument one step further, stating the deal would “effectively enable Google to set the prices for key search terms on both their and (Yahoo!) search platforms and, in the process, raise prices charged to advertisers on Yahoo.

While it would be hard to prove a keyword-auction would enable Google or any search engine to “set prices,” the deal would increase keyword prices based on Google’s ability to monetize inventory more efficiently.

Yahoo responded by promising (again) to maximize shareholder value and pursue strategic opportunities. Yahoo still maintains Microsoft undervalued the company.

Yahoo! banged the drum (again) about:

“– a refined strategic focus to drive enhanced volume and yield;

– reorganized to focus its efforts on its most promising products and services;

– invested in innovations designed to revolutionize display advertising and facilitate closing the competitive gap in search; and

– enhanced expense and resource management to support improved profitability.”

As Jerry Seinfeld might have said, “Yadda, Yadda, Yadda, Yahoo.”

Be prepared Monday for Yahoo shares to plummet back to earth. (Full text of Steve Ballmer’s statement after the jump.)

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SearchIgnite has released search marketing spend data for Q1 2008 and the news is good for Yahoo, and so-so for Google and Microsoft. Year-over-year, same advertiser spending was up across all engines by 28.5%, but a slowdown in March spending growth is raising concerns for Q2.

Yahoo demonstrated the largest gain with a 57.6% increase in search marketing spend from last Q1. However, since Q1 2007 was a rough one for Yahoo, due to Panama’s delay, those numbers should be examined with caution.

Breaking it down by month, Yahoo saw a 79.2% gain in January, 37.3% gain in February, and 43.9% increase in March.

In quarter-over-quarter numbers, Yahoo’s share of the market grew from 19.6% to 24.2%, while Google dropped from 74.5% to 70.4% and Microsoft dropped from 5.9% to 5.45%.

SearchIgnite tracked over 22 billion impressions and 391 million clicks on Yahoo, Google, and MSN from January 1, 2006 through March 31, 2008 across more than 500 marketers, all of whom are clients of SearchIgnite directly or via its sister company 360i.

Related Reading:
Even for Google, Conversions Matter More Than Clicks
Is Google’s Price Drop A Reflection Of Recent Media Coverage
Search Spend Seems Healthy Despite Slowing Economy

Want a snapshot of the day’s search marketing news? Here we’ve collected today’s top news stories posted to the Search Engine Watch Blog, along with search-related headlines from around the Web:

From the SEW Blog:

• Google Defends Security Policy
  Douglas Merrill, Google’s VP Engineering, published an impassioned defense of Google’s security policy.
• Cable Firms Collaborate to Compete with Google
  Executives from the six major cable companies have been gathering at monthly meetings in an attempt to offer national advertisers innovative methods of reaching their customers.
• BoomTown Calls Out TechCrunch: No Google-Digg Buyout
  It seems that Digg’s canoodling with bankers Allen & Co. is more along the lines of delegating the task of handling incoming interest rather than putting a “For Sale” sign up at its San Francisco offices.
• The New Multitaskers: Kids Split Attention Between TV, Internet
  A new study on social networking by Grunwald Associates reveals that kids are no longer glued to the television. Now, while the tube is on, many kids are also splitting their attention between the TV and the Internet.
• Introduction to Search Engine Marketing at SES New York 2008
  It’s hard to provide “a clear and concise overview of the key concepts involved in Search Engine Marketing” when half of them have changed significantly since last year.
• Panama or AdCenter? Microsoft Has Already Decided
  If its proposed acquisition of Yahoo goes through, don’t expect Microsoft to rush to integrate Yahoo’s technology into its platform.
• CAPTCHA Systems are Under Attack
  Should spammers ever succeed in breaking through CAPTCHA, a lot of social media web sites and blogs are going to have a big, big problem. Now, Virtual Blight reports that this is on the verge of happening.
• Best Web Site Traffic: PPC vs. SEO (Search Engine-Optimized) Sites
  How does your PPC traffic compare to natural search traffic and direct navigation? A study by Engine Ready finds that that type-in traffic is the highest converting and “most valuable” traffic.
• SEW Experts: Every Picture Tells a Story: Non-text Contextual Ads
  Like contextual text ads, image ads must distract the user and sell a product quickly.
• Jason Calacanis TechCrunched in Techmeme: Deathmatch at SES New York
  Duncan Riley of TechCrunch fame bodyslammed Jason after his Calacanis.com post on how to run a startup.

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If its proposed acquisition of Yahoo goes through, don’t expect Microsoft to rush to integrate Yahoo’s technology into its platform.

In an interview with the Financial Times, Microsoft’s Chief Software Architect Ray Ozzie said that Microsoft will proceed carefully with any kind of integration, due to both technology and culture differences between the companies.

This comes on the heels of Microsoft’s declarations of its intentions to catch Google in the search and online advertising game. While the $41.6 billion takeover of Yahoo is a core element of increasing its search market share, the company will also be rolling out more internet services aimed at complement existing traditional software.

Yahoo has been resisting Microsoft’s courtship. Last week, the search engine was talking to AOL about a possible merger, though many saw the talks as simply a delaying tactic.

According to Michael Arrington at TechCrunch, today’s the day Yahoo’s board will make a decision on how to proceed with Microsoft’s takeover bid:

“There are only two options left. Accept the offer in principal, and try to increase the price with no negotiating leverage at all, or do a deal with Google to outsource search advertising and, likely, search itself.

The board, we’ve heard, is basically being told by outside advisors to take the Microsoft deal. But we’ve also heard that a contingent of senior executives at Yahoo, who are willing to do literally anything to thwart a Microsoft takeover, are pushing for the Google deal and will present their case at the meeting.”

One concern of Yahoos may be losing the company’s identity and being assimilated by Microsoft. In an effort to assuage those fears, Microsoft CEO Steve Ballmer gave empty reassurances in an interview with Business Week. “Yahoo, the brand, will live,” Ballmer said. He didn’t elaborate on that, of course, so it could be anything from Microsoft’s premier online brand to a token start page (think Netscape).

Yahoo’s Panama platform will not likely be as lucky, if Tarek Najm, adCenter’s general manager, has anything to say about it. He told Business Week there was nothing he liked about Panama that he would want in adCenter: “We’re the leaders in technology,” Najm says. “Ours is better.”

Many search marketers were disappointed with the Yahoo Panama release, finding it to be more of a catch-up to Google than a leap forward. In today’s Brand Equity column, “Why Search is Still Prehistoric - Part 2,” Eric Qualman explains that the cause of that disappointment may result from Yahoo trying to please advertisers, instead of searchers, with Panama.

Hold on tight SEM artists. Search marketing is mainstream bacon & eggs in America this morning. Even the “tease” story on the Today show was Microsoft’s “huge takeover bid to purchase struggling” Yahoo!

Microsoft’s profits have been soaring due to increased demand for computer software. Yahoo is in the dumper, having just laid off 1,000 people. Is this acquisition finally real?

In 2006, the SearchEngineWatch blog was aBuzz with “Microsoft buying Yahoo” posts and hashing out possibilities in search marketing forum chit-chat threads. The Wall Street Journal prognosticated about the possibility of “a major departure for Microsoft.” They wrote, “Microsoft has considered the idea of acquiring a stake in Yahoo, and that the two companies have discussed possible options over the course of the past year.”

Some SEMs who love major search engine drama games saw this one coming down the pike years ago, and are still salivating. For others, the very idea would be hell. Personally it makes me just giddy.

The potential implications for both organic and paid search marketing could be del.ici.us for the Microsoft desktop. For PPC the much maligned Panama and AdCenter paid advertising platforms, along with all their graphically beautiful albeit dysfunctionalretarded inadequacies, could be fixed.

Think about the intriguing social media marketing adventures which would be possible. Maybe Yahoo Answers will integrate in Windows Mobile OS. Office 2009 might just include Word documents sporting a new “Insert/Flickr Image” function. How does this affect the market landscape for Google’s much heralded GPhone initiative. An aligned Yahoo/MS mobile platform-play would no doubt be a fascinating addendum to the Linux vs. Windows shoot out.

How will Yahoo email mashup with Outlook? What would pumping Yahoo Pipes into the MS machine mean to the feed aggregation paradigm? How would Microsoft create marketing mechanisms marketing to the decade old Yahoo Personals social graph?

The list goes on. MSN AdCenter was the first mainstream engine to dabble in demographic targeting, but the interface is weak. One would hope a combined Yahoo/MS team would know what to do with reams of data Yahoo has gathered about us all.

Aside from the potential effect on Yahoo/MS investors and the American economy (which will be reported on ad nauseum), the implications for the search marketing industry could be massive and exciting. Stay tuned. It might finally be true. Hold on tight search marketers and we’ll see how it all mashes up.

Yahoo’s Yodel Turns Into a Whimper. That’s how BusinessWeek described the Yahoo earnings call. In his NY Times Tech blog, Saul Hansell savaged Yahoo execs on the conference call for not articulating a strategy, obfuscation, and excessive use of jargon.

I disagree, so we’ll let our search industry readers decide for themselves.

Here are the 5 most important questions Wall St. analysts asked and Yahoo executives answered about Search, excerpted courtesy of SeekingAlpha.com, where you read the full transcript of Yahoo’s earnings call and tomorrow’s Google earnings call (January 31).

Judge the answers for yourself. There are golden nuggets you’ll be able to use when developing your search engine strategies.

Brian Pitz, Banc of America: Would you comment on whether you continue to see click-through rate improvements from Panama accelerating since Q3?

Susan Decker, President, Yahoo: Brian, the click-through rate improvements have been the primary driver of the RPS (revenue per search) gains, as we have said in the past. We don’t get too specific on all the components, but I did mention that in Q4 a couple of initiatives that will help advertiser ROI actually may have limited our gains and were deliberate moves against coverage. We have seen continued improvement in click-through rates and as I mentioned, the RPS gains in Q4 were pretty consistent with what we saw in the prior two quarters of close to 20%.

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Yahoo Panama posted a 20 percent improvement in RPS (Revenue Per Search) in Q4, following three consecutive revenue growth quarters. “Yahoo O&O” - owned and operated — was the new search buzzword tossed around during the conference call. More good news: search revenue grew by approximately 30 percent. International search for Yahoo properties showed RPS gains accelerating into the high teens.

Improving the quality of traffic with domain controls and ad quality filtering promise to improve lead quality and advertiser ROI over time. The cleanup, though, limited Yahoo’s revenue growth in Q4. Yahoo’s stock price dropped below $20 again.

Search marketers, agency owners, CEOs, and CMOs need to know whether Yahoo CTR improved due to Panama; how the recession will affect search and display advertising; and how much Yahoo share of total searches improved.

4 Yahoo Q4 Trends All CMOs Need to Know

1. Search marketers can count on improved click-through rates from Yahoo searchers clicking on paid search (PPC) ads.

2. Search continues to be strong and as close to “recession-proof” as any form of online advertising. Advertisers can expect high ROI unless the recession significantly reduces commercial searches.

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Internet hackers brought down the Web site of Panama’s National Assembly and briefly posted an American flag there, after the legislature voted in as its president a man accused of murdering a U.S. soldier.
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