Other Bids Possible?
At the same time, now that Microsoft has made its move, it wouldn't be surprising to see other suitors jump in and make competing bids for Yahoo, Sterling said.
Unless Microsoft were to run Yahoo like an independent unit, there will be significant areas of overlap that would need to be integrated.
"If Microsoft were to seek a more integrated company [with Yahoo], certain products or brands would be favored and others discontinued," Sterling said.
Still, a joint Microsoft-Yahoo would from day one be a formidable player in display advertising and mobile Internet services, he said.
Ever since the first rumblings about a possible acquisition of Yahoo by Microsoft, things have gone downhill for Yahoo, including several reorganizations and management shakeups, so the deal appears more plausible today, Sterling said.
At the same time, despite considerable investments, Microsoft hasn't made as much progress in search engine advertising and usage as it had hoped, he said.
Looking for Ad Boost
This is something Ballmer acknowledged candidly on Friday's conference call, though the company had been trying to paint a rosy picture of its online advertising market growth since it acquired digital media services firm aQuantive last year. However, the company's online services business has long suffered from lackluster performance, something he said should change once Yahoo is on board.
"We've been losing money [in online services], our plan here is not to lose money in the future," Ballmer said.
A combined Microsoft-Yahoo would improve their respective positions in the search market, but still wouldn't top Google, which has a dominant lead both in search engine usage and advertising, Sterling said.
As Microsoft seeks to grow its online advertising business, it needs to achieve "critical mass" in three key segments -- advertisers, publishers and consumers, Ballmer said. While Microsoft's aQuantive acquisition boosted the advertiser and publisher rosters, a Yahoo acquisition would significantly bolster the consumer piece of the strategy.
"We see this announcement as the next major milestone in Microsoft's company-wide transformation to embrace online services overall and to invest very successfully in search and advertising," Ballmer said.