Live Nation and AdBrite in Local Ads Deal

Concert promoter Live Nation and online ad network AdBrite have entered into a interesting, multi-year partnership that creates a platform for Live Nation’s online advertising — with a distinctly local focus. Live Nation does lots of local advertising in traditional media and is now moving some of those dollars online.

The new AdBrite powered portal is called “Live Nation eFan Finder” and it allows band managers and local Live Nation salespeople to see local online ad placements and track the performance of those ads. Below is a screenshot of the dashboard for one campaign:

The ad placements/inventory and targeting capabilities come from AdBrite’s network, which include geographic and demographic options (as the campaign above suggests). According to the release, “Live Nation’s local marketers are able to easily create and place tailored ad campaigns for the company’s concerts, utilizing geo-targeting and other advanced matching technologies to connect with music fans on AdBrite’s network of 50,000 web sites.”

AdBrite’s marketing VP Paul Levine, who previously ran Yahoo! Local, made the very interesting point to me that in addition to providing greater transparency than other ad networks this helps to solve a problem that plagues local online advertising. Local/SMB advertisers want to see their ads, which is difficult  in a dynamic online environment, and this addresses that challenge: advertisers can see the creative and precisely where the ads are running.

If you think of these band managers and local salespeople as SMBs, or franchisees in a sense (vis-a-vis Live Nation), you start to see how this model for AdBrite has potentially broader applications and implications.

Order (Pizza) Online, Deliver Locally

CNN profiles the online ordering efforts of the nation’s largest pizza chains:

In the past seven years, Louisville-based Papa John’s International Inc. has made a lot of dough from online ordering — more than $1 billion to be exact.

The nation’s third-largest pizza delivery chain trumpeted the $1 billion milestone Wednesday, noting that its U.S. online sales have been growing at an average clip of more than 50 percent per year. In 2001, the chain’s online sales totaled $20.4 million. Last year, its online sales approached $400 million.

I write about it because “pizza” is the archetypal local search subject. But I also bring it up because this is very much like Circuit City or Wal-Mart’s “buy online, pick up in store” feature. It’s also like online booking for local businesses (e.g., HourTown, ZocDoc, GenBook, Booking Angel). So is this “e-commerce” or local commerce?

It’s a hybrid model that reflects the integration of the Internet with the “real world” and points the way to much more of this sort of thing in the future: online order taking with offline fulfillment.

The Need for an IYP Network

The yellow pages publishers are all competing with one another online and to varying degrees offline. But what they need to do is sit down in a room and start working together. They’ve done it with “frenemies” Google and Yahoo!; so why can’t they do it with one another?

First, they need to support coordinated marketing for the industry that reflects a new multi-platform strategy: print, online and mobile. They’re all doing this to some degree independently with the net result being less visible and/or powerful than a joint effort. That consumer marketing will also get the message across to advertisers as well so it’s valuable for that reason too. (The conundrum here is that AT&T paid $100 million for the “brand” Yellowpages.com and probably doesn’t want to share any of that equity with anyone else.)

Then they all need to build a joint online ad network (as the newspapers are doing with Yahoo! and quadrantOne). They may even want to use a third party platform such as Adify or RightMedia to expand beyond IYP sites. The chief problem for any individual IYP is volume. Marketers like the conversion rates on IYP sites but almost uniformly want more volume. (That is not true for true SMB advertisers however.)

If the publishers could get together and pool their traffic they would go a long way toward accomplishing that. IYP publishers are using Google and Yahoo! as part of their extended “networks” but there is a difference there.

There are various local ad networks today:

• MediaSpan
• WorldNow
• Internet Broadcasting
• Quigo (now part of AOL)
• NNN
• quadrantOne
• Marchex
• Centro (not a network per se, but functions like one in some respects)
• Traditional ad networks offer geotargeting but are typically “blind” save AdBrite

Those criticisms may be less true for YP publishers and IYP sites but forming some sort of larger network would benefit them with certain groups and categories of advertisers – especially national advertisers or brands that have local outlets or franchises.

Once upon a time the YP industry was poised to come together in a portal strategy to compete with Google and Yahoo! in search. That never actually happened but now might be a good time to revisit an updated version of this idea.

SMX Local & Mobile Pitch Time

To all those who’ve contacted me in email and/or are interested, session submissions are now open. Please see the agenda and related session descriptions and then submit your session pitches here (scroll).

If you’re coming and havent registered, you can do so here.

The conference is skewed toward tactical and practical information for SEMs and companies doing search marketing. There’s less of an emphasis on business outlook at this show.

Palore Crawling Producing Interesting Data

Palore, which I’ve advised, some time ago changed its model from consumer plug in to data aggregator for third party destination sites. The company had been aggegating data from a range of sources, largely about restaurants. But it came to the conclusion that fighting the battle on the consumer front was too challenging. So the model was changed and the company is collecting data and licensing that to third party sites.

In the process of doing that they’re finding some interesting things. For example, the company recently was able to show the relative percentages of restaurants in US cities with websites:

An earlier post showed the relative depth of content for NYC restaurants among several competing consumer destinations:

The company is moving beyond restaurants into other local categories as well.

Free-411 Rolls Out Dial Directions Nationally

Jingle Networks’ 800-Free-411 for now is the “free DA” market leader. But it has been joined by a broad range of competitors:

• 1-800-GOOG411 (Google)
• 1-800-Call-411 (MSFT, Tellme powered)
• 1-800-Yellowpages (AT&T)
• 1-800-2ChaCha (”mobile answers”)
• 1-800-The-Info (Verizon)
• 1-800-555-Tell (Tellme)
• 1-800-555-5555 (potentially)

This also doesn’t include the voice-powered (or operator-assisted) mobile applications:

• Yahoo’s oneSearch with Vlingo
• MSFT Live Search with voice
• The Tellme client (a new version launches today for the Blackberry)
• V-Enable’s FreeMobile411

There’s also the mobile Internet itself, which competes with DA in some cases. In the future, mobile social networks may also address some of the queries that might have gone to DA (e.g., category searches). Right now the latter is quite speculative however.

Against that backdrop Jingle needs to continue to develop, market and differentiate its service if it hopes to stay ahead of this increasing competition. One way it has sought to do that is by offering Dial Directions service, which as of today is now available nationally: any location to any other location (by address or intersection).

The rest of this post is on Local Mobile Search.

An Argument in Favor of MicroBook

At one point or another, most of the big online media companies have talked about buying Facebook. Yahoo is rumored to have made an early offer of almost $1 billion for the company, which was (obviously) turned down. But as the MicroHoo discussions appeared to be deteriorating, Microsoft apparently made some formal inquiries about Facebook’s willingness to be acquired, according to the Wall Street Journal.

There are a number of people who believe that buying Facebook for $15 billion (its purported valuation) would be a foolish move for Microsoft. That price tag would make it the largest acquisition in Microsoft history by about $9 billion (aQuantive was $6 billion), but still less than a third of the proposed $47 billion that Microsoft was prepared to pay for Yahoo.

When Facebook Platform was first announced in May of last year with Microsoft as one of its inaugural partners, it immediately struck me that Microsoft would eventually acquire the social network. Then, when Microsoft made its $240 million investment, it seemed the company was moving on a path toward that eventual outcome.

There are very few, if any, companies beyond Microsoft with the cash or the willingness to pay $15 billion for Facebook — not even Google. Its only other recourse would be an IPO. While that might quickly elevate the top executives at the company to the Forbes’ billionaires list, becoming a public company presents many challenges for Facebook.

The rest of this post is at SEL.

Homethinking, Trulia, Zillow & More

There’s lots going on in the real estate vertical. Here’s a roundup of some of the latest news over the past couple of days:

Homethinking has introduced a new mortgage center that provides interesting data and heatmaps on lending patterns through the US. Founded by former Jupiter analyst Niki Scevak, the site is cash flow positive without a dime of VC money. Impressive.

Here’s his post explaining the details of the new section.

Homethinking offers for sale home listings through a marketing partnership with Trulia, which is putting out data today about consumer attitudes toward foreclosures. The survey was conducted by Harris Interactive. Findings include the following:

• Almost 20% of men aged 18-34 don’t know what a foreclosure is Nearly 20% of single people don’t know what a foreclosure is More than 50% surveyed would consider purchasing a foreclosed home
• 70% of U.S. adults feel that there are negative aspects to purchasing a foreclosure
• Almost 50% of respondents cited hidden costs as a negative aspect to purchasing a foreclosed home
• 24% mentioned the possibility of the home losing value 23% considered the prospect risky
• 20% of U.S. adults said that having a personal connection with someone who lost their home to foreclosure is a negative aspect of purchasing a foreclosed home

Zillow also released data that showed the depressing state of home valuations in the US:

Not surprisingly, homeowners who purchased during a market peak are at most risk of being underwater on their mortgages. Of homeowners nationwide who purchased when U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth. For those who purchased in 2005 and 2007, the situation is only modestly better with nearly 42 percent and 45 percent, respectively, facing negative equity. By comparison, 16 percent of those who purchased in 2004 have negative equity, as do 7 percent of those who purchased in 2003.

This depreciation trend is driving lots of nasty behavior on the part of banks, which are freezing or reducing equity lines without much notice to consumers.

DotHomes, which launched in the US in January, says it passed the “2 million listings” mark. It crawls as its primary method of obtaining listings data. And real-estate site “beatyouthere” launched. While it claims to be differentiated on the basis of social media/community tools and capabilities there’s no there there, yet.

Finally, European real estate search engine Properazzi launched in the US.

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I neglected to mention a slew of sites that have been around for awhile, started by Xooglers, that seek to address the rental market:

• www.rentmarketer.com
• www.rentbits.com
• www.apartmentmarketer.com

Marchex Gains, Beats Estimates; Market Slow to Understand Local Opportunity

Marchex reported Q1 revenues and gained on advertiser growth:

Revenue was $37.0 million for the first quarter of 2008, compared to $34.2 million for the same period of 2007.

The company has also recently announced a series of deals with partners seeking to gain additional, qualified local traffic from its network.

The “market” still doesn’t really understand local and Marchex is struggling to educate the market and tell a coherent story about what it’s doing.

Once again, let’s be clear on what local is about: It’s NOT about yellow pages advertisers and SMBs, though that’s an important part of the story. It’s also NOT about “the long tail,” though that’s there too.

Local is first and foremost about transactions and the point of sale; it’s about where the money changes hands. E-commerce is a bit player in retail and the Shopatrons, Where2GetIts, Krillions, NearbyNows, ShopLocals, Channel Intelligences of the world threaten to marginalize it and further flatten its growth.

The Internet, fundamentally, is a “consideration” medium that helps consumers make buying decisions that are consummated offline (read: Local). Part of that is finding SMBs but it’s also about products and brands — in a big way. (See alternative segmentation of SMB market discussion.)

The future of advertising is about the smart integration of media — online and off — and better visibility and tracking of performance. Mobile integration with traditional media, inventory feeds and more complete end-to-end tracking will help make all this more transparent for folks eventually.

Ever since I left the Kelsey Group I’ve tried to re-frame the definition of local to more clearly expose what’s really going on with the Internet and consumers. Neither the advertisers, nor most of the ad networks, nor the publishers are yet advanced enough to fully respond to this reality — and opportunity.

But it’s coming.

More from Local Mobile Search

Over in my parallel world — Local Mobile Search — here are some posts from today and the past 24 hours:

• 800-555-5555 Launches in Legal Vertical
• Kooaba: Another ‘Point and Click’ Company
• iPhone Previews Future Sales Strategy
• Truvo Launches Mobile Client with mobilePeople
• Sprint Scores Coup with WiMax Joint Venture
• What Will Happen to Sprint?
• Consumer Privacy Groups Try to Get in Front of Mobile Marketing
• Vodafone to Sell iPhone in 10 Global Markets
• HTC Replaces ‘Touch’ with ‘Diamond’

Spot Runner Raises Another (Really) Big Round

Spot Runner seems to keep raising money. Today the company is announcing another mega-investment round; this time $51 million, from Daily Mail and General Trust (DMGT), Grupo Televisa, Legg Mason Capital Management and Groupe Arnault/LVMH, along with some existing investors.

That brings the total money raised to date to more than $100 million. Ka-ching!

The official word is that the money will help expand the scale and scope of existing operations as well as major international efforts. Spot Runner has been a takeover target for some time but the size of such a deal now would need to be very very large. The valuation must now be several hundred million dollars. The company is rumored to be profitable and could be an IPO candidate at this point. (Several prominent hires could suggest something like this.)

Spot Runner made a few strategic miscalculations in the past, which it has arguably now corrected by buying Globe Shooter and Weblistic, now being integrated. The company is moving toward a multi-platform media buying strategy in which agencies and marketers can integrate both online and offline media buys — and localize them. This is the future and Google is pursuing a similar vision in a somewhat different way. (See also my post on Live Technology Holdings.)

Seen as a video platform or “agency” for SMBs — the company has come a very long way from that original vision — Spot Runner faces increasing competition from smaller startups; there are probably 10 or so one could point to. But here’s the “secret sauce” and what makes this company potentially extremely valuable for not-so-obvious reasons: addressable advertising.

Brandweek has a good story on this coming phenomenon in TV; it’s partly what the future vision for Google TV is too:

Industry watchers say addressable advertising—the ability to target TV ads by household so that, say, a 50-year-old man watching Lost would see a different ad than a 14-year-old girl watching the same show next door—is getting closer to a national rollout.

From the same article:

In the meantime, some advertisers are flocking to what may be the only form of national addressable advertising on the market. Spot Runner, a local television advertising firm in Los Angeles, is helping advertisers adopt addressable advertising on the local level through national buys. The company did so last year when Warner Independent Pictures released The Painted Veil. It targeted ads for the art house film to mature female viewers in the 18 specific neighborhoods where the movies were playing. Gus Warren, vp of strategic partnerships at Spot Runner, said even without set-top box capability, Spot Runner can target as few as 500 homes with the right commercial.

(emphasis mine.)

So Spot Runner is a localization and an emerging cross-media buying platform for agencies and advertisers, but it can also deliver something today in television that others cannot — as TV comes under increasing pressure to justify ad rates.

Idearc Beats Estimates, RHD Rises Too

Idearc beat analysts’ Q1 earnings estimates. Here’s the top-line:

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter 2008 were $359 million, up 1.4 percent compared to the same period in 2007. On an adjusted pro forma basis, first-quarter EBITDA was $367 million, a decrease of 3.2 percent compared to the same period in 2007. Adjusted pro forma EBITDA margins reflected a slight increase at 47.7 percent in the first quarter 2008, compared to 47.0 percent in the same period in 2007.

Net income was $111 million (an increase of 7.8 percent versus the same period in 2007), or 76 cents per diluted share, for the first quarter 2008. On an adjusted pro forma basis, first-quarter net income was $116 million (a decrease of 2.5 percent versus the same period in 2007), or 79 cents per diluted share.

Free cash flow for the period was $193 million based on cash from operating activities of $202 million, less capital expenditures of $9 million.

Multi-product advertising sales for the first quarter declined 6.2 percent compared to 2007.

Idearc gained 44%, while competitor RH Donnelley gained almost 30% on the news.

ZocDoc: One Doc at a Time

After being aware of ZocDoc since launch I finally got a chance to talk to founders Cyrus Massoumi and Oliver Kharraz, MD. They pitched it as “Open Table for healthcare.”

Other than general, horizontal review sites and parent/mom sites (e.g., Baby Center) the only other site I could think of that solicits reviews of doctors is Steve Case’s Revolution Health. However, there are few actual reviews on the site that I could find.

ZocDoc by contrast only solicits reviews from actual patients after they’ve booked appointments through the site. I was told by Kharraz that 25% of first-time patients do write reviews, which is a much-better-than-average figure for user-generated content sites.

In one sense, ZocDoc competes with HourTown, Booking Angel, Libersy and Genbook because it provides online booking. It charges a fee when bookings are made. However, it’s really competing with other health sites and consumers destination sites that offer recommendations for health care providers. But because of its methodology it prevents gaming — doctors and their families are unable to write reviews — and brings a potentially higher level of trust to its ratings.

Also, by combining reviews with online booking, ZocDoc has removed a potential barrier for first-time patients in doing online appointments. That is because, in absence of quality indicators, some first-time patients might want to have a phone conversation before committing to an appointment. In fact Massoumi told me that they had an 800 number and a call center when the site launched but have since removed it given how few people were using it relative to online bookings.

Massoumi and Kharraz are only focused on Manhattan and won’t say when they’re going to roll out more broadly. They want to get that market right before going to others, which is the right strategy.

Yellowbook Launches New Ad Campaign

Yellowbook announced yesterday that it had launched a new, multimedia ad campaign, part of “a full branding makeover.” The site has tweaked its design somewhat and there’s a new logo (pictured above). Traffic measurement service comScore previously said the site was one of the top 5 gaining properties in 2007.

The site though much improved than in the past still needs to add more content to help users make buying decisions (decision support) among a range of competing providers. Like its rivals, Yellowbook also has video.

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Related: AT&T’s Yellowpages.com touts its success, including in mobile.

New on Local Mobile Search

Here are some posts from the last 24 hours or so on Local Mobile Search:

• Google: Verizon Seeking to Thwart ‘Open Access’
• Price Drives Consumer Interest in Coming Cable-Wireless Offerings
• AP Mobile News Network Formally Launches
• Thoughts on WAP, Skyfire and Microsoft
• US Underdog Nokia Readies American Handset Push
• Mobile TV Showing Some Traction in Europe
• Report: ‘T’ Might Buy Sprint

How Long Before YouTube Video Pages?

Yellow pages are starting to sell, shoot and integrate video. So are other local sites such as Citysearch and various verticals. Indeed, video will replace or be integrated into most display advertising online in the next two years. The static banner or tile ad is or will soon be dead.

But how long before sites like YouTube launch video yellow pages or “video pages”? YouTube is one of the prime distribution points for video and being used by virtually everyone distributing video. According to Hitwise, in the US, YouTube has a 73% market share:

Source: Hitwise

There’s lots of local video already on YouTube, which could be indexed by Google in Maps and/or become part of a stand-alone area/channel on YouTube. Doing the latter would encourage business owners to upload even more video, which is currently buried amid all the noise that dominates the site.

Washington Post Income Way Down

The Washington Post Company announced Q1 results on Friday. Profits were off 39%; newspapers and magazines were down, while education (Kaplan) and TV revenues were up to varying degrees. Paid circulation also fell at the newspaper, 4%.

Online growth couldn’t offset print losses, which will continue. The question is: when will they stabilize?

Meanwhile the NAA cites Borrell data and trumpets online newspaper revenues:

Newspaper-owned Web sites maintained a three-to-one lead over other local competitors in advertising market share last year.

While this is interesting and good PR for newspapers (we can discuss and debate the numbers), it doesn’t really matter unless those ads actually perform for marketers and newspapers can truly use online to stabilize their organizations. However, as I’ve tried to argue in the past, newspaper sites are not going to be sufficient by themselves as an online strategy for newspapers; they’ll need to expand and diversify.

Reuvers Responds to ‘SMB Segmentation’

Last week, I posted “Alternative Segmentation of the SMB Market.” There were lots of comments about the math and some about definitions. Live Technology Holdings CEO Wayne Reuvers, who was the source of the segmentation I posted about responded in a detailed comment. I thought that was worth highlighting so I’m reposting his remarks vertabim:

Nice debate - but let me clarify a few things as these figures come from me:

Firstly, I see the local marketing opportunity made up of SMEs, not just SMB. In our view, “enterprise” is an enterprise that operates as it’s own entity. For example, a Best Buy store is actually an SME - they have complete responsibility for their own P&L - and they do advertise locally. So is a Home Depot store, as is the local Deli (SMEs encompass SMBs).

Let’s look at Branded Branches (60-65%):
These are enterprises that are required to execute all marketing, advertising and communications under a brand. It includes everything from a branch of a large bank, a McDonald’s franchise, a Century21 agent, a Best Buy store, a Lowes Theater, a Chrysler dealership, etc. Interestingly, a huge number of these also advertise in the YellowPages (almost all of them).

The co-operative sellers (30-35%):
These are companies with their OWN brand that sell products or services branded by others. The Best Buy does sell other companies products, so they do also “sorta” fall into this category, but it’s easier to leave them in the Branded Branches category. Examples here include a local deli that is selling P&G, General Mills, Pepsi and Coke products, a restaurant that receives co-op from the beer distributors, Joe’s Cellular that sell T-Mobile, VZW, etc., and the local hardware store, the local appliance store, etc. ALL of these execute marketing an communications with the help of the larger brands that do not have branded branches - Coke, P&G, Sony, Nike, Boar’s Head, a huge list. These folks also advertise in the Yellow Pages.

The independents (1-5%)
These are folks that typically sell services only. Local contractor, small law firm, accountants, small agency, independent plummer, etc. Yes, they do advertise in the Yellow Pages, but are the total base of the $14bn in advertising. I estimate they are about 40% of YP. And they do very little outside advertising, mainly stationary, a flyer in the local deli or a small classified ad in the local paper.

In terms of the local market expenditure, I include measured media (about $110bn-$135bn) and unmeasured which includes DRM, FSI, in-store, alternative media, stationary, sales materials, merchandise, directory, event, which ads up to about $125bn. Total is around $240bn. Chrysler’s 4257 dealers spend $384,000 on average each - a total of $1.6bn. That’s 60% more than the brand spends nationally.

For some reason, everyone thinks that local marketing will be dominated by SMB’s. SME’s will continue to dominate, those with brands will continue to account for 60%+ going forward.

As for co-op collection, the largest co-op advertising industry is cellular - and the wireless operators cover 60-70% of the media spend. 28% of Whirpool’s products are sold through non-branded co-operative sellers (small appliance stores), and they contribute about $240m a year to these. Most of these brands fight to get their brand out through the players. Coke and Pepsi are great examples, as are MillerSAB and AB.

Finally, Brand is about Emotion, Local is about Promotion.

MSFT-YHOO: The Fallout

Franky, I don’t have the energy this morning to do an elaborate analysis of all the potential scenarios. Here’s a list however:

• MSFT comes back at some future point and bids again
• MSFT goes after AOL now
• MSFT buys Facebook for $15 billion
• MSFT goes on a buying spree and picks up several, high-profile sites (e.g., Digg, LinkedIn, etc.)
• Yahoo!, needing to do a deal to placate shareholders and show momentum, still does a deal with AOL and/or Google
• In a “be careful what you wish for moment,” Y! now needs to really execute on AMP and YOS (open strategy)
• Yahoo! is off about $6.4 in pre-market trading. If it ends the day above $20 that will be a win for the company because of the “Black Monday” expectations.
• Here come the shareholder lawsuits re Yahoo!

Here’s a quick re-cap of the timeline of events and here’s more speculation about what will come over at Techmeme.

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From Yahoo! CEO Jerry Yang’s post:

So, what’s next? With Microsoft’s withdrawal, we’ll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders. We’ll continue to execute on our plan — making your Internet experience as personal, relevant, open and social as possible, serving advertisers so well they insist on working with us, and opening up Yahoo! in a way that developers dream of. And, we’ll also continue to pursue strategic opportunities that position us for long-term success.

Has this experience changed us? Of course, it has. We’ve emerged a stronger, more focused company with an even greater sense of purpose. I’m so proud of how this company has come together, put the noise aside, and showed the world that we have the resolve and determination to thrive in challenging times.

We know the spotlight will probably stay on us for a while. That’s fine — we have a clear path ahead and momentum to build on. And thousands of dedicated Yahoos around the world who have held up well to scrutiny. It’s now up to us to show what we Yahoos can really do.

By the way, I’m sure you’ve all read or watched the news about this. Frankly, there’s a lot of nonsense and misinformation in what’s being reported. Just so we are all clear, here’s what happened. The board took its mission very seriously. We clearly indicated to Microsoft that we were open to a transaction but only if it were on terms that fully recognized the value of Yahoo! and was in the best interests of our stockholders.

No one is celebrating about the outcome of these past three months… and no one should. We live and work in a competitive world and the Web is only going to get more competitive. Executing on our strategic plan is what matters most.

Microsoft Withdraws Yahoo Bid

Amazing and true. Here’s the letter confirming this, just released:

Dear Jerry:

After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

· First, it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.

· Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

· In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

· This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

· It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.

We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.

I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

But clearly a deal is not to be.

Thank you again for the time we have spent together discussing this.

Sincerely yours,
/s/ Steven A. Ballmer

Steven A. Ballmer
Chief Executive Officer
Microsoft Corporation