What 'Micro-hoo' could do for mobile

NEW YORK (Fortune) -- A Microsoft-Yahoo ticket would significantly increase the Redmond, Wash.-based company's share of the online advertising you see on your PC. But it could also ramp up its presence on the smaller screen.

Microsoft (MSFT, Fortune 500) already makes one of the top-selling mobile operating systems, which runs on over 140 devices made by phonemakers such as Samsung, Motorola (MOT, Fortune 500) and HTC.

Yahoo (YHOO, Fortune 500), meanwhile, is strong on the applications side - it recently launched a new version of its mobile Web portal, called "Go," that includes search, mapping, news and other services, and has inked several mobile advertising deals with carriers.

Should the proposed acquisition go through, analysts say the two could become a powerful player in the mobile industry. They could also turn into a challenging competitor to Google (GOOG, Fortune 500)'s Android, an "open" operating system for cell phones the leading search engine unveiled late last year.

Although Google has managed to get four phonemakers to sign on to Android's "Open Handset Alliance," a consortium of manufacturers, developers and carriers, a Google-running phone isn't expected until later this year. According to research firm Strategy Analytics, Android phones won't ship in significant volumes until 2009.

Microsoft's Windows Mobile operating system, meanwhile, already runs on about 9% of phones worldwide, comparable to BlackBerry maker Research in Motion (RIMM)'s global market share. Symbian, the world's largest mobile operating system, has over 50% market share and runs on the majority of Nokia (NOK)'s handsets.

"A merged Microsoft/Yahoo could start to develop the kind of integration between platform and applications that is still only a gleam in Google's eye," Ovum analyst John Delaney said in written commentary published Monday. He added that the two companies could "interwork" Yahoo's offerings with Microsoft's operating system, enabling easy-to-use and more tightly integrated mobile applications.

Put simply, thanks to its operating system, Microsoft could provide greater reach for Yahoo's mobile applications, while Yahoo could give Microsoft the content and services - and so-called "stickiness" factor - it lacks.

"Microsoft has focused more on the operating system end and Yahoo has focused more on applications," Ovum analyst Delaney said in a phone interview. "Together, the combined companies would have both pieces."

Of course, Google has also gained some traction on the mobile services end. It is the mobile search provider for several large carriers, including Vodafone.

Although the Android operating system doesn't have any end users yet, Strategy Analytics analyst Chris Ambrosio says a Microsoft-Yahoo alliance doesn't necessarily mean Android will be doomed.

"Right now I'm of the opinion that a rising tide lifts all ships," says Ambrosio.

All three companies - Microsoft, Google and Yahoo - have their eyes on the real prize: Cell phone-based ads, a still-nascent market analysts predict will bring in revenue ranging from $5 billion to $19 billion by 2011. Nearly three billion people worldwide have a cell phone - a much larger audience than online advertising has today.

And, unlike the PC, mobile devices have the ability to serve up highly targeted ads based on an individual's location.

It's unlikely the mobile effects of the proposed Microsoft-Yahoo deal will be felt for several years, as the industry itself is still in its infancy. But unlike some of its more well-known consumer offerings - e-mail and online search, for example - mobile is one area Microsoft can afford to heavily integrate Yahoo offerings with its own without running the risk of alienating current users. That's because, when it comes to mobile services such as search and news, there aren't that many current users to alienate.

While mobile expansion isn't the principal motivation behind Microsoft's bid for Yahoo, analysts say it is a key component. Ovum analyst Delaney calls it the "icing on the cake" for Microsoft.

"Like a good chess move, an acquisition should change the game along multiple vectors," says IDC analyst Shiv Bakhshi. "Microsoft has so many business under its umbrella, and you can bet mobile will be one of the ones affected by this move."