There are four major wireless carriers in the U.S., and all but Verizon Wireless (NYSE: VZ) have a default mobile search provider. Both AT&T (NYSE: T) and T-Mobile USA use Yahoo! (NSDQ: YHOO) and Sprint (NYSE: S) Nextel uses Google (NSDQ: GOOG). If Verizon Wireless chooses Yahoo!, that company would have an astonishingly dominant U.S. market share; if it chooses Google, it too, would have a commanding lead; and then there’s Microsoft, which has everything to lose since it needs the deal to stay alive. Because of these factors, the negotiations have stretched over a grueling two-year period, and have whittled down to a standoff between Google and Microsoft (NSDQ: MSFT). In the end, it will surely be about garnering market share, rather than reaping profits.
Reports have claimed that Microsoft is close to edging out Google because it’s guaranteeing payments between $550 million and $650 million over five years, or about twice what Google is offering. We have heard that those reports are seriously inflated and that the actual payments are substantially less…however, either way, the deal needs to be looked at as a strategic play since it will be uneconomical for the winner at the price ranges being discussed. Mark Mahaney, a Wall Street analyst at Citi, wrote a very thoughtful piece that attempts to dissect the economics behind such a deal. Here’s some of the analyst’s findings:
— Deal is uneconomical: Mahaney said that breaking even on a deal that guarantees a $100 million payment over five years (for a total of $500 million) would be “challenging at best.” Based on calculations, Mahaney believes the average revenue per search for Google is 5 cents on the PC and 2 cents on the mobile phone and for Microsoft it’s closer to 1 cent on the phone. In order to break even, Google would have to get each Verizon subscriber to conduct 10 searches a month, and Microsoft would need to generate 17 searches per subscriber each month. “Given current low Mobile Search Penetration rates, we would view these as near-term aggressive assumptions.”
— Google dominates mobile search: Mahaney also factored in usage, as reported by Nielsen Mobile. Only about 20 percent of U.S. cellphone users search today and Google owns most of the share, at 61 percent of the queries (which is comparable to its 62 percent share online). “We believe people