How Understanding Sectors Can Help to Minimize Risk - WSJ article by Chris Kenney

SHAREHOLDER SCOREBOARD
How to Weather Turbulence
What investors can glean from the Scoreboard; one key: understand relative risk among sectors.

By CHRIS KENNEYFebruary 25, 2008; Page R2
Investors are worried. The Dow Jones Industrial Average ended last year 6.4% below its October record close and has fallen further since then. The housing market is in turmoil, banks are posting big losses and economic growth may be about to grind to a halt.
What can the Shareholder Scoreboard offer investors as they weather market volatility and recession concerns and need to reassess their investment strategy?
The Shareholder Scoreboard was developed in 1996 to provide investors with a long-term perspective on the creation of value in the stock market. For various time periods, it reflects the trends, bubbles, corporate winners and laggards that have affected investor returns. But given the rising uncertainty in the economy today, it is likely that investors are much more concerned with the immediate future.
THE JOURNAL REPORT

Best Performers (1, 3, 5, 10-Year)
Worst Performers (1, 3, 5, 10-Year)
• See the complete Shareholder Scoreboard report.
FINDING THE COMPANIES THAT SHINE

PODCAST: Chris Kenney of L.E.K. talks with the Journal's Georgette Jasen about some of the main themes in this year's rankings, using the Scoreboard as a starting point for looking at companies and sectors, and other topics.

Although stock-market history clearly has limits in its ability to inform us about the future, there are several investment insights to be gleaned from this year's Scoreboard that may help investors calm their nerves and balance their portfolios as they look at 2008 and beyond.
The first thing is to put the stock-market volatility experienced in 2007 (and so far this year) in some perspective. Although investors with limited experience or short memories might have been struck by the market's turbulence, we have experienced far worse volatility in recent years. Second, for those who want to manage their portfolio risk more actively, it is important to understand relative risk across industry groups to avoid the next sector downdraft. Finally, individual-company risk can vary quite widely from one sector to another, so investors who like to pick individual stocks should examine the range of returns within a given industry.
A look at each of these issues can help investors manage market risk when it begins to feel most unmanageable.
Be Ready for Turbulence
Investors certainly had a bumpy ride last year. Average daily price swings for the companies in the Dow Jones U.S. Total Market Index were more than 50% greater in 2007 than in 2006. Turmoil within the housing sector bleeding into the financial sector led to both real and perceived volatility.
Because we are all most influenced by recent history, the roller coaster that investors rode in 2007 might lead some to believe that recent market volatility is at historically high levels. Investors might be inclined to keep their money on the sidelines and wait for calmer times.
But the truth is that relative to the past 10 years, 2007 market turbulence was well below average. Volatility is typically defined using a statistical measure called standard deviation, which looks at how much or how little data diverge from the average. As the first chart indicates, even though last year was turbulent, six of the past 10 years demonstrated even higher volatility.
What can investors do in turbulent times? Clearly, the tried-and-true strategy of diversifying across asset classes, geographic regions and sectors should be the first line of defense. For example, had you invested equally across all the Scoreboard industry sectors, the return would have been an average 13.8% annually over five years. Alternatively, the average annual return on just five sectors would range from 1.1% to 59.6%, depending on which sectors were chosen.
Broad diversification across stock sectors therefore is one of the most useful tools in managing risk. Ask yourself if there is any reason to have more than 10% of your stock portfolio in any one sector. Then be vigilant in rebalancing your portfolio as the value of your investments changes over time.
Watch Out for Maverick Sectors
Yet even reasonably diversified investors can be burned by industry sector risk. For example, just a 5% exposure to the home-building sector in 2007 would have reduced a portfolio's total value by 2.5%.
So it is also useful to understand the extent to which industry returns vary from the overall market. Investors who commit too much of their portfolio to "maverick" sectors -- those whose returns deviate enormously from the market average -- can inadvertently assume more risk than they intend.
To illustrate this, we have identified 10 industry sectors that, over the past five years, diverged the most from overall market returns on a month-by-month basis.
The measure used is called R-squared. Simply put, it shows the relationship of movements in each sector to movements in the overall market. If the movements are 100% correlated, this means that all the stock movements in a sector can be explained by movements in the market. Alternatively, if R-squared is 0%, then overall stock-market returns explain none of the returns in the sector and sector-specific factors are driving stocks. We consider sectors mavericks if less than a third of their returns are explained by returns on the overall market. Here are the top 10 maverick sectors for the past five years:
You can see that only about 5% of the returns in the home-construction sector were explained by overall stock-market movements. Similarly, the overall market explained less than 1% of the returns in travel and tourism.
There is a logical explanation for these sectors to be so detached from overall market returns. Pharmaceutical-company fortunes, for example, are not tied to the general economy nearly as much as to the prospects for specific drugs. Similarly, cyclical and capital-intensive sectors like autos, forestry and paper, and semiconductors can deviate substantially from overall market returns.
It is useful for investors to know what percentage of a portfolio is invested in maverick sectors. Though the past is not always prologue and industry dynamics can change, ask yourself how likely your target sectors are to move based on broad economic or sector-specific factors.
Another reason to identify maverick sectors is that, in moderation, they can be quite useful in diversifying portfolio risk. For the very reason that they tend not to move with the market as a whole, they can help offset movements in the market.
The implication is not to avoid these sectors but to keep your exposure manageable. Balance your stock investments with modest exposure to one or more maverick sectors, but don't let them grow to more than 10% of your total portfolio. And include a mix of more market-oriented sectors.
Among the sectors that most closely tracked market returns:
Some of these are sectors closely tied to industrial and commercial activity (industrial services, commercial vehicles and trucks). Sectors that are closely tied to movements in interest rates (utilities, life insurance) and relatively stable goods and services are also represented (medical supplies, waste and disposal services).
Stock Pickers Beware
Just as industry sectors can vary widely in their levels of volatility and risk, so too can companies within sectors. In some sectors, company stocks move quite closely with sector returns. In others, company returns can vary widely from sector returns. This is because company returns in these sectors are affected by unique factors rather than factors that affect all companies in this sector. In these cases, individual stocks carry greater risk.
Consider the semiconductor industry in 2007. Company returns deviated enormously from the average return of 28.6%. A top-performing company in this sector was MEMC Electronic Materials Inc., which generated a 126% return. The worst-performing company was Advanced Micro Devices Inc., whose return was minus 63%. Most investors diversify their investments to eliminate most of these company-specific effects. For those who may decide to own one or two stocks within a given sector, however, it is useful to know which sectors have companies whose returns deviate the most from the sector average.
Using standard deviation as a measure of how tightly data are clustered around the average (low standard deviation) or, conversely, how widely dispersed they are (high standard deviation), we can see that returns for companies in the following 10 sectors deviate the most from the sector average. Presumably that's where stock pickers are taking a proportionately greater risk when they invest.
Again, there is some logic behind "high deviation" sectors. Chemicals and semiconductors are capital-intensive and highly cyclical industries. The exposure of individual companies to these economic cycles can vary dramatically. Similarly, industries such as biotechnology, with companies that depend on the discovery and successful development of new products, should be expected to demonstrate a broad range of returns.
The sectors with the lowest standard deviation of company returns include:
These tend to be consumer-oriented products or slower-growth sectors where companies may have less opportunity to generate differentiated returns.
The key lesson from the Scoreboard data is that the market's volatility in 2007 wasn't extraordinary. If this volatility proves unbearable, you can always reduce your exposure to stocks. But there are two questions you might ask first:
• Am I too exposed to "maverick" sectors, those that don't track the overall market? • Am I too exposed to a small number of stocks in "high deviation" sectors, where returns on individual stocks deviate widely from the sector average?
Reflecting on the answers can help manage investment stress in turbulent times.

prepare for the unthinkable - Terry Savage at Moneycentral.msn.com

Prepare for the unthinkable: long-term care


If it can happen to Superman, it can happen to you. More than 12 million Americans need long-term care, and almost 5 million of those are working-age adults. Here's how to prepare for the worst.

By Terry Savage

Ill bet youre not considering the prospect that you might need nursing home or skilled home health care. But the unthinkable can happen. Just ask Superman -- actor Christopher Reeve. Reeve was paralyzed in a 1995 horse-riding accident, joined millions of Americans who require nursing care at home or who now reside in nursing facilities.

You insure your home against fire and your car against an accident -- and never complain if that money is wasted. Why not insure against one of the most expensive realities of life -- long-term care? As our lives lengthen and new treatments are developed, you -- or your parents -- are more likely to require some type of senior care.

With a little planning, you can buy long-term care insurance -- either for yourself, or as an annual gift for your now-healthy parents. And you can encourage your company to provide this coverage as an employee benefit. Otherwise you may become one of the 7 million Americans who, according to the National Council on the Aging, now provide or manage care for a friend or relative aged 55 or older and not living with them.

Long-term care insurance is a product that catches the attention of seniors, but the ideal time to buy it is actually when youre in your early 50s and in good health. At that point, premium costs are lower, and youre less likely to have a pre-existing condition that disqualifies you. But a society that values a youthful appearance seems unwilling to recognize these expensive facts of life.

The costs of long-term care are staggering today and should soar higher in the coming years when baby boomers retire. Even the GenXers wont escape the impact. Your parents will either spend your inheritance on nursing home care, or you may find yourself taking care of your elderly parents out of your own retirement funds.

In fact, the U. S. General Accounting Office says that nearly 40% of people age 65 now will spend some time in a nursing home. The federal Health Care Financing Administration projects that spending on nursing home care will rise from about $94.1 billion now to $125 billion a year by the end of 2005 and $330 billion by 2030.

The average annual cost of a private nursing home is now about $55,000, or $150 per day -- with many facilities in large cities costing more than $65,000 a year. Those costs can add up quickly, and Medicare does NOT cover them -- except for a few days in a skilled nursing facility after a hospital stay.

And no Medicare supplement policy covers custodial nursing care. Yes, state Medicaid programs cover nursing care for the indigent -- but that means almost all assets and income must be spent down before the state will pick up the tab.

Medicaid spend-down planning has received attention as a way to deal with the nursing-care costs. Financial advisers counsel seniors to transfer assets to younger family members -- a process that must be completed at least three years before asking Medicaid to pay nursing home costs. But these state nursing home programs for the impoverished do not cover home-health-care costs. And aside from the moral implications of such a strategy, do you really want you or your parents to depend on a government-funded nursing facility?

Long-term care insurance can solve the problem in most cases. The latest generation of policies pays for "home care" at a senior daycare facility, as well as care in a skilled or custodial nursing facility. A portion of premiums may be tax-deductible, depending on your age and income. But not all policies are alike, the business is growing (There were just 4.1 million policy holders in 1998.) and coverages are constantly evolving, so study both the product and the pricing.

Nuts and bolts
If youre thinking about buying long-term care insurance, heres what you should know before you buy.

The cost of a long-term care policy depends primarily on three basic factors: your current age, your current state of health, and the location of your residence. Unless you move, you cant control any of these. But you can control such questions as the amount and length of coverage, the elimination period (deductible), and whether youve chosen an inflation rider.

Buying early pays. A healthy 50-year-old could purchase more than adequate coverage for $1,365 a year. For a 73-year-old, the same policy might cost $6,300 a year. This four-year coverage would include a 90-day deductible or elimination period, $200 per day in coverage (for home health care or nursing home care), and a simple inflation rider -- all on a policy from a top-rated company.

Good health now pays off later. Once youve locked in an annual premium, it cant be raised if your health changes. But insurance companies can ask state regulators to raise premiums for an entire age group, depending on claims experience. Unfortunately, many companies have raised premiums in recent years, once they realized theyd underpriced their policies. (See below, on choosing a reputable insurer.)

While some insurers require a medical examination, most just ask for a medical reference. However, any false claims could result in future denial of coverage.

Where you live affects costs. Thats because nursing costs typically are higher in major metropolitan areas than in smaller communities.

Length of coverage: The average stay in a nursing facility is 2.5 years, so some people opt to limit coverage length to cut costs. But if youre purchasing a policy in your mid-50s, youll find that lifetime coverage is not much more expensive.

Elimination period: This is like a deductible and works like one. You agree to pay for the first 60 days or 90 days of needed care; then the policy kicks in. Having a 90-day deductible can cut premium costs substantially.

Inflation rider: Even a 3% inflation rate can cut the value of your dollar in half in 25 years. Plus, assume health-care costs will rise more than the general inflation rate as boomers age. So it may pay to buy an inflation rider. All tax-qualified policies today (see below) must offer this coverage as an option.

Other issues
Benefit payments and triggers: A qualified physician must certify to the insurance company that you need the benefits -- and those benefits will be paid only to qualified caregivers. A daughter who simply does your shopping and prepares meals wouldnt qualify as a caregiver, but she might if shes a trained professional.

Most policies require the inability to perform at least two activities of daily living to trigger the benefits. The activities include being able to dress yourself, bathe yourself, move from a bed to a chair, use toilet facilities or eat unassisted. Policies will also pay out if you cant pass certain mental function tests. (Look for a policy that specifically includes coverage for mental or cognitive impairment.) Most policies no longer require a hospitalization before benefits start, but check the wording anyway.

Insurance companies may pay benefits using one of two methods:

Expense-incurred benefits: These are paid either to you or to your provider up to the limits in your policy.

A daily benefit or indemnity: This will be paid directly to you. But be sure your policy offers a pool of benefits on a daily or weekly basis allowing you to pay for covered services as needed, as well as nursing home care.

Tax-deductibility: You may be able to deduct part of your annual premium as part of a medical deduction. But remember, you can only deduct medical expenses that exceed 7.5% of adjusted gross income. The size of a deduction depends on age. People over age 61 can deduct $2,510 (assuming they meet the 7.5% threshold). Almost all policies sold before Jan. 1, 1997 were grandfathered and are considered qualified. Benefits paid by a qualified policy arent generally considered taxable income -- even if your employer paid the premiums.

Options
Waiver of Premium: This provision lets you stop paying the annual premiums once youve moved into a nursing home and the insurance company has started to pay benefits. It may not apply if you are receiving home health care.

Premium Refund: Some policies will repay your estate any premiums you paid, minus benefits used. Usually, theres an age limit, typically 65 or 70.

Non-forfeiture benefits: If you drop your coverage, perhaps because you cant afford the premiums, you can receive some benefits for the money youve already paid in. But this feature can boost the policy cost substantially.


Find a strong company
Make sure youve purchased from a company with a strong financial base, and a 10-year history with this insurance, so it will price policies properly and be there when you need it. A number of companies jumped into long-term care insurance without adequate data on which to base prices.

Companies such as Fortis and Travelers have either sold their long-term care businesses to others or reduced sales. But John Hancock, UnumProvident, and GE Financial have become big players in this business. Companies that raised prices substantially for existing policyholders include Conseco and Penn Treaty.

Independent insurance expert Martin Weiss has created a ratings service for long-term care companies at his Web site, Weiss Ratings. Weiss suggests that experienced companies have more claims-paying data on which to accurately price policies. He also warns that if you ask an agent whether a recommended company has ever raised premiums, the agent will probably say no. Thats because companies change the identification number of a policy, in effect creating a new policy, when they ask for a rate increase! Ask whether an increase in premiums has taken place on this type of policy instead of on this specific policy.

An alternative coverage
A number of companies are marketing a combination of life insurance and long-term care coverage that lets you withdraw some of the death benefits (not the cash value) to give guaranteed long-term care coverage. Golden Rule Insurances Asset-Care plan requires a single premium, one-time deposit of cash into a policy. The company will either guarantee a minimum rate of interest or offer a variable choice of investments inside the life policy. It provides at least 50 months of long-term care benefits. You can buy extended coverage. The downsides of the policy: its expensive, and some people dont have the cash to make the upfront deposit.

The need for long-term care can occur at any time of life. Of the 12 million Americans who need long-term care, nearly 5 million are working age adults. If something happened to you -- or your parents -- how would you cover the cost? Dont say youd just leave it to the government. Instead, take a minute to stop by a nearby nursing home. You would certainly bring some cheer to the patients there. And youll gain new respect for those who provide care. And, I hope, youll be inspired to do some planning now, before the need arises. After all, thats what insurance is all about.

Putting Things in Perspective - from NY Times

.... comments from James Patterson, a former advertising mogul who now writes best-selling mystery fiction...

Think of life as a game in which we juggle five balls labeled Work, Family, Health, Friends and Integrity.

“One day you understand Work is a rubber ball. You drop it and it bounces back,” Mr. Patterson is quoted as saying. “The other four balls are made of glass. Drop one of those, and it will be irrevocably marked, scuffed, nicked and maybe even shattered.”

"Two Paths for the Aspiring Alpha Female"
By HARRY HURT III
Published: February 17, 2008 New York Times Business Section

tax brackets 2008 - from MSN Money

http://articles.moneycentral.msn.com/Common/Taxes/2007TaxBrackets.aspx

Here is how the brackets change in 2008.

2008 tax rates and brackets
For single taxpayers



If taxable income is at least . . .
But not more than . . .
Your tax is:

$0
$8,025
10% of the amount over $0

$8,026
$32,550
$802.50 plus 15% of the amount over $8,025

$32,551
$78,850
$4,481.25 plus 25% of the amount over $32,550

$78,851
$164,550
$16,056.25 plus 28% of the amount over $78,850

$164,551
$357,700
$40,052.25 plus 33% of the amount over $164,550

$357,701
No limit
$103,791.75 plus 35% of the amount over $357,700





For married couples filing jointly*



If taxable income is at least . . .
But not more than . . .
Your tax is:

$0
$16,050
10% of the amount over $0

$16,051
$65,100
$1,605 plus 15% of the amount over $16,050

$65,101
$131,450
$8,962.50 plus 25% of the amount over $65,100

$131,451
$200,300
$25,550 plus 28% of the amount over $131,450

$200,301
$357,700
$44,828 plus 33% of the amount over $200,300

$357,701
No limit
$96,770 plus 35% of the amount over $357,700

* Or qualifying widow or widower







For married couples filing separately



If taxable income is at least . . .
But not more than . . .
Your tax is:

$0
$8,025
10% of the amount over $0

$8,025
$32,550
$802.50 plus 15% of the amount over $8,025

$32,551
$65,725
$4,481.25 plus 25% of the amount over $32,550

$65,726
$100,150
$12,775 plus 28% of the amount over $65,725

$100,151
$178,850
$22,414 plus 33% of the amount over $100,150

$178,851
No limit
$48,385 plus 35% of the amount over $178,850





For heads of households



If taxable income is more than . . .
But not more than . . .
Your tax is:

$0
$11,450
10% of the amount over $0

$11,451
$43,650
$1,145 plus 15% of the amount over $11,450

$43,651
$112,650
$5,975 plus 25% of the amount over $43,650

$112,651
$182,400
$23,225 plus 28% of the amount over $112,650

$182,401
$357,700
$42,755 plus 33% of the amount over $182,400

$357,701
No limit
$100,605 plus 35% of the amount over $357,700



Published Dec. 6, 2007

Leadership ( Entrepreneur magazine)

The Role of a Leader
Leaders are made, not born. Brian Tracy reveals how to lead your employees effectively.

By Brian Tracy | January 25, 2008



URL: http://www.entrepreneur.com/management/leadership/article189618.html


Your ability to negotiate, communicate, influence and persuade others to do things is indispensable to everything you accomplish in life. The most effective men and women are those who can competently organize the cooperation and assistance of other people to accomplish goals and objectives.

Of course, everyone you meet has different values, opinions, attitudes, beliefs, cultural values, work habits, goals, ambitions and dreams. Because of this incredible diversity of human resources, it has never been more difficult and yet more necessary for diplomatic leaders to emerge and form these people into high-performing teams.

Fortunately, leaders are made, not born. You learn to become a leader by doing what other excellent leaders have done before you. You become proficient in your job or skill, and then you become proficient at understanding the motivations and behaviors of other people. As a leader, you combine your personal competencies with the competencies of others into a smoothly functioning team that can outplay and outperform all its competitors.

When you become a team leader, even if your team only consists of one other person, you must immediately develop a whole new set of leadership skills. To determine what these skills are, you need to consider the genesis of high-performing teams.

Teams generally go through four phases as they evolve toward high performance: forming, storming, norming and performing.

Forming
The forming stage is very important, perhaps even critical, to the success of the team. Your ability to select the proper team members to accomplish a particular task--personal or business--is the mark of the superior leader. If you select the wrong people in the first place, it becomes almost impossible afterward to build a winning team, just as it would be impossible to win athletic championships with unskilled or ill-suited players.

In the forming stage, the team members come together and begin to get a feeling for each other. There will be a good deal of discussion, argument, disagreement, personal expression of likes and dislikes, and the forming of friendly alliances between team members.

This stage, especially the discussions and conversations that take place, may seem time consuming, but it's indispensable to developing a unified group of people that you can lead. One of the most important qualities of a leader is patience. And patience is never more necessary than when you're going through the early stages of assembling your team.

Storming
The second stage of team development is storming--a shortened form of "brainstorming." During this stage, the group, whose members are now comfortable with each other, begins the hard work of setting goals and deadlines, dividing up the tasks and getting on with the job. During the storming phase, people learn about the contributions each member can make to achieve the team's objectives.

Norming
The third stage of team development is norming. This is when norms and standards are established among the team members so that everyone feels secure and confident in his or her place. All members know what's expected and how their performance will be measured. They also are aware of the responsibilities and obligations that they have, not only to the job, but to each other. Your ability as a leader to promote the norming process is critical to the team's success.

Performing
The fourth stage of team development is performing. In the final analysis, your ability to get results is all that really matters. Your lifestyle, your rate of promotion and level of rewards, and your respect and esteem among your co-workers and bosses will all be determined by your ability to perform and to get others to perform.



There are basically five qualities you need to foster throughout the stages of team development. The degree to which you accomplish this before you start working will determine your success as a team leader and the success of the team.

1. Shared values. You can foster this quality by asking the question, "What are our values?" or "What do we stand for?" People will contribute the values they consider the most important. As they do, you or someone else can write them on a flipchart. The values will usually be something like: integrity, excellence, quality, caring about people, profitability and harmony.

2. Shared objectives. Everyone must take the time to discuss the actual reason for forming the team and the chief results that are expected.

Leaders can see the big picture. They're absolutely clear about what they want to accomplish and what it will look like. They have the ability to articulate this vision in the minds and hearts of others and to get everyone, no matter what their background or personality, working together in harmony toward the realization of that vision.

People can't hit a target they can't see. Again, even though it may appear time consuming, everyone needs to have ample opportunity to discuss and agree on the ultimate goals desired before work begins. The more thorough the discussion of goals and objectives, the more effective the team will be when it begins working.

3. Shared activities. Everyone knows what they're supposed to contribute to achieving the team's goals and objectives. They also know what each of the other members is expected to do. All the work is clearly divided up among the team members, and everyone knows their role in the process.

4. A team head who leads the action. You become the role model for all of the others. You go out in front. You continually look for ways to make it easier for your team members to do their jobs. You accept complete responsibility for achieving the overall goal. You start a little earlier, you work a little harder, and you stay a little later. You set careful priorities on your time, and you always work on your highest value tasks. You never ask anyone to do something that you wouldn't do yourself. You always put yourself out in front and go to bat for your people in every circumstance. You are a leader because you continually lead.

5. Team members who continually evaluate their progress. They're always asking themselves, "How are we doing, and how can we do better?" When they manufacture or sell products in the marketplace, they ask their customers for ongoing feedback and evaluation. They set incredible standards of excellence and are constantly striving to be better.

Whenever they have problems, misunderstandings or difficulties within the team, they reexamine their values, their goals, their activities, their assignments and their responsibilities. They're more concerned with what's right than with who's right. They're more concerned with winning than with not losing. High-performing teams run by excellent leaders are determined to perform in an excellent fashion. All members know that their ability to work together in harmony and cooperation is the key to all of their success.

The wonderful thing about becoming a leader in your work and personal life is that you can practice the skills of influencing and persuading others toward a common objective. You can promote the principles of excellent teamwork by establishing your values and goals, determining your activities and then leading the action. And you can improve yourself by continually evaluating your performance against your standards.

One of the marks of excellent people is that they never compare themselves with others. They only compare themselves with themselves and with their past accomplishments and future potential. You can become an even more excellent person by constantly setting higher and higher standards for yourself and then by doing everything possible to live up to those standards. The more proficient you become at getting the results for which you were hired, the more opportunities you will have to get results through others. And your ability to put together a team and then to lead that team to high performance will enable you to accelerate your business and fulfill your goals faster than ever before.

Brian Tracy is the most-listened-to audio author on personal and business success in the world. His talks and seminars on leadership, sales, managerial effectiveness and business strategy provide people with proven ideas and strategies that they can implement immediately for improved results. For more information, visit BrianTracy.com

What MSFT bid for YHOO means for GOOG (Fortune Magazine)

February 1 2008: 2:48 PM EST
What Microsoft's Yahoo bid means for Google

Microsoft and Yahoo are the only two companies that can combine and give the Net's colossus a run for its money. Somebody needs to.
By David Kirkpatrick, senior editor


(Fortune) -- With Google's stock already down considerably in recent weeks, the Web's next two most powerful players today struck a powerful blow for equality and influence in the increasingly-important Web ecosystem.

Wonderful as Google is, the world and the entire Internet and media industry needs for its power to be countered and, if possible, matched. Genuine competition drives innovation. Without, everybody loses.

Google has gotten so large and dominant on the Net that it was only a matter of time before it began to encounter regulatory restraints, especially in Europe. A Yahoo-enhanced Microsoft could actually be a perverse benefit for Google by keeping those overseers off its back.

Search remains the Web's best business. That's where the lion's share of ad dollars are spent, and Google controls more than 60% of it. Together, Microsoft and Yahoo will own almost 30%. If they can hold onto it that's enough to be a meaningful competitor.

Microsoft controls a huge and multifaceted Web presence, and retains still-almost-unlimited financial resources. The combination of all that with Yahoo's superior Web brand and deeply entrenched position as a marketplace for display advertising and online media is probably the only one that can begin to match the Google machine.

And since search is a game of scale, the two combining companies each acquire exponentially greater power than either could command on their own. Like buyers and sellers of goods on eBay, both buyers and sellers of search ads want to do business where there is the largest number of counterparties. If there aren't a lot of sellers you don't want to buy ads from Microsoft - or anyone.

Both Microsoft and Yahoo have also been working to address this problem by acquiring impartial ad-marketplaces in the last year. Microsoft stunned the world by paying over $6 billion for aQuantive, signaling for the first time how serious it was not to be left behind by Google.

Separately, Microsoft still exercises unparalleled influence on the devices that the people of the planet use to connect to the Web. Its monopoly on desktop software remains essentially unbroken despite inroads from Apple and open source. And in the all-important area of mobile it has in the last year or so shown it finally is getting traction from handset makers worldwide, especially in the developing world and China.

As for Yahoo, it still hangs on to its bragging rights as the most-visited set of sites on the web, even though Google has been threatening in recent months to overtake it as its strength, particularly in developing markets, grows and grows.

Finally, the financial resources of Microsoft (MSFT, Fortune 500) could prove critical for keeping Yahoo's businesses viable in the face of the Google (GOOG, Fortune 500) onslaught. Very few companies can afford the billions in investment - especially in data centers and infrastructure - that will be required going forward to compete globally in search, advertising placement, and mobile content delivery. Yahoo alone simply didn't have the cash. Microsoft does.

As Imran Khan, analyst at J.P. Morgan Securities wrote in his note on the deal this morning, "A combination of Yahoo's relationships and Microsoft's applications and devices could create a very well-positioned competitor" for Google.

All media is slowly moving towards the Web, along with advertising. The complexities of targetting, delivering, formatting, and promoting that content grow ever greater with the move toward mobility and as the television too gets pulled towards the Web. In the all-digital world we are entering, the distinctions between on-Web and off will increasingly disappear. So to command the marketplaces and platforms for digital content is, for both tech and media companies, the most important mandate.

Google (GOOG, Fortune 500) has the clear lead among all companies in achieving such command. But today we've seen the beginnings of a bi-polar Internet. It will influence and rearrange the competitive alliances and strategy of just about every company that aspires to a digital future.