Display Ads - Microdoft, Yahoo Common Grounds

SAN FRANCISCO (Dow Jones)--As per breaking news, Microsoft Corp. (MSFT) and Yahoo Inc. (YHOO) are at the table to discuss - yet again - a combination of their Internet businesses. A new twist: The possibility that Yahoo take over Microsoft's display advertising business.

On Friday, a person familiar with the situation said Microsoft Chief Executive Steve Ballmer and Yahoo CEO Carol Bartz had met to discuss potential partnership structures. A range of ideas were being discussed, though a full acquisition of Sunnyvale, Calif.-based Yahoo is not among them, the person said.

An intriguing aspect of the new talks, which stem from discussions that started last year, is the concept of Redmond, Wash.-based Microsoft turning over its some of its display advertising operations to Yahoo, the leader in the Internet billboard market. This would likely be part of a broader collaboration that includes the much-larger search advertising market, where Yahoo and Microsoft trail far behind rival Google Inc. (GOOG).

The new wrinkle is tacit recognition the two companies have far more to gain by joining forces to battle Google than they stand to give up in terms of independence or control. Microsoft has a tiny share of both search and display advertising, but has the resources, technical capacity and will to take on Google because the company's ubiquitous software is the way many users will access Internet search.

And despite all its problems, Yahoo has an Internet brand that few companies can hope to match. It is still the largest player in the display advertising market.

Whether the two sides can cut a deal remains an open question. Since Microsoft's $47.5 billion unsolicited takeover offer collapsed last May, the relationship between the two companies has been guarded at best. Relations have thawed since co-founder Jerry Yang surrendered stewardship of Yahoo to Bartz in January. Investors, many of whom feel taking on Google individually is near impossible, are pushing the companies to collaborate.

Andrew Frank, an analyst at research firm Gartner, said a partnership between the companies would allow them to get the best of each others' businesses and technologies, while preventing needless duplication and competition. Some disciplines, like advertising sales, would naturally fall to Yahoo. Microsoft could better focus on its strengths like helping Internet publishers manage ad inventory.

Of course, a display deal wouldn't be a silver bullet for either company. Display advertising is less than a fifth of the $23.6 billion market for Internet advertising in the U.S. The big money is made in search advertising and the lion's share of it is being made by Google.

Still, a display deal may pave the way for a larger collaborative relationship that resolves both companies' thorny search problems.