IDC suggests a Microsoft + Yahoo + Fast combo could be a strong #2

A third component could be key to an effective Yahoo / Microsoft merger could be an enterprise search solutions provider whose crown jewel is now part of Yahoo, but whose core business will soon be part of Microsoft, says an IDC report.

A panel of 13 IDC analysts led by research VP Susan Feldman coalesced all day and into the night on Friday, eventually producing a document touting the benefits not just of #3 online search provider Microsoft acquiring #2 provider Yahoo, but also continuing with its plans announced last month to acquire Fast Search & Transfer, the producer of dedicated search applications for enterprises.

Microsoft has already bid $1.2 billion to acquire Norway-based Fast, in a deal that is expected to garner little, if any, opposition. If Microsoft were to later acquire Yahoo, it could mark a heartfelt reuniting of Fast with its public search platform AllTheWeb, which was sold to Yahoo in 2004.

"Microsoft is largely a business-oriented software vendor. It makes sense for Microsoft to get into the business of selling infrastructure software or middleware to businesses that want to monetize their audience and their content," wrote Feldman's team, in a citation of their final draft. "FAST's Ad Momentum product provides this capability, and it goes nicely with a company that looks at the business side of Web commerce."

A thorough analysis of the scale and reach of an integrated Microsoft + Yahoo is difficult to determine, especially given the fact that so many of their clients are non-exclusive. As Burst Media CEO Jarvis Coffin reminded BetaNews last week, many advertisers sign up with the #1 provider first -- Google -- then either choose to invest in the #2 and #3 providers in tandem or not at all.

That said, IDC postulated over the weekend that sites powered by a combined Microsoft + Yahoo would represent 22.7% of all ads served to US Web users, compared with Google's 32.5% share and the "new" #3 AOL's 5.4% share. And while sites powered by Google's advertising would reach 80% of the US audience, a new #2 would reach 73.7%, while new #3 AOL would reach 67.7%.

Speaking with BetaNews, IDC's Feldman said Microsoft should pay close attention to the parts of Yahoo it could acquire, rather than selling those parts off or discontinuing them. "Yahoo is an extremely viable business," she said, "and that fact gets lost in the media reporting."

She also expressed concern as to whether Yahoo would sell off some of its own acquisitions prior to a takeover, which would be equally detrimental to a deal.

"Users will have to be assured that Yahoo Mail and Yahoo Instant Messaging are continued," she said. "These could give Microsoft a way to get to those small- and medium-sized businesses under the Yahoo brand."

And that brand might be stronger than Microsoft realizes. "From the user's point of view, Yahoo is strong," Feldman reminded BetaNews, citing IDC findings that users spend more time on Yahoo today than they do on Google, even if they read fewer pages and generate fewer impressions.

It's from the investor's point of view, she said, where Yahoo appears weakest.

A much longer draft of the IDC report that Feldman shared with BetaNews over the weekend took several other factors into account, including Yahoo's expanding presence in the multimedia field. It has brand presence with households whose digital TVs utilize Internet connections, to a degree which Microsoft has never yet enjoyed, the earlier draft pointed out. And that brand presence points to such services as on-demand television, which could lead Microsoft to a separate treasure trove of revenue over and above the Web.

That draft also put forth the opinion that Yahoo may have the strongest presence of any other software brand in the consumer mobile space, especially when Yahoo's Go 3.0 service is compared against its three leading competitors with advertising platform presences: AOL with its Third Screen, Nokia with its Enpocket, and Microsoft with its ScreenTonic. Brand recognition is critical in the mobile space, said the early draft, regardless of which part of the service that brand represents, because in the end, all brands in the mobile space are competing for public attention. And in that regard, Yahoo competes now with Apple.

It's Google which is the startup in that space, only now bringing up the rear with its Android platform and its involvement in the 700 MHz auction, the early draft stated. But that momentum could close fast unless Microsoft makes a bigger push, implying that it cannot leverage its Windows brand too far from the PC space into the mobile space without losing its balance.

The current draft of the IDC report evaluates the potential benefit of the Yahoo brand for Microsoft in Asia, where Yahoo continues to be a major search and media player, especially in China and Japan. "It would be wise to consider the strength of Yahoo overseas, especially in China, where Google's search market share is small, especially compared with Baidu's," reads the current draft. "Yahoo could be a major asset for Microsoft in this market."

But the early draft also focused on the possibility that the Yahoo brand might help Microsoft regain a modicum of swagger among small business customers, including those who simply look for Microsoft for software. Microsoft is already making inroads in addressing SMB customers with service-based software such as Office Live, though some would say that progress remains slow. The Yahoo brand in Microsoft's arsenal, stated the earlier draft, might give the company greater reach among those customers.

That reach, IDC's Susan Feldman told us, "could give Microsoft a way to collect Internet tolls that they couldn't before."