Why Yahoo's ad inventory is so important to Microsoft

With all the threats, promises and negotiations around the pending acquisition of Yahoo by Microsoft, it's easy to lose sight of the key driver of the deal: Increased ad inventory.

While folks trying to read the tea leaves for signs of CEO Steve Ballmer's moods or Yahoo CEO Jerry Yang's whims often say that Microsoft wants Yahoo in order to gain search share, there's actually more at stake here.

Microsoft positioning itself to collect on next-generation ads across just about all of its consumer and small/mid-size business (SMB) product lines.

Check out the agenda for Microsoft's upcoming invitation-only annual ad-summit, known this year as "Advance 08 Advertising Leadership Forum," which is slated for mid-May in Redmond. Microsoft plans to showcase how digital advertising will figure in a bunch of current and future products. From the program:

"Experience Innovation is an exciting new addition to the program offering a visually immersive and interactive environment to explore. You'll experience the latest advertising innovations including Mobile, Surface, Media Center, Synch, Progressive Video Ads, Block Reader, Xbox 360, Zune and many others. This is the best hands-on experience you can get outside of the testing labs!"

I'm not 100% sure what "Synch" is; I'm guessing Live Mesh. (Microsoft has been working on tools for delivering ads on social networks, as well, via its adCenter Labs unit.) Actually, I bet it's "Sync," as in the voice-activated phone/music system for cars. What's "Block Reader"? Not a clue.

(I also find it interesting there isn't a mention here of MSN. Originally, this conference was known as the "MSN Strategic Account Summit.")

All of these consumer products -- plus other more business-focused ones, like the ad-funded Microsoft Works, which is in pilot; Office Live Workspace; and Office Accounting Express, to name a few -- are likely to become key ad platforms in the not-too-distant future.

Robbie Bach, Microsoft president of Microsoft's Entertainment & Devices Division is lined up to give his "connected entertainment" spiel. I wonder if this could be the coming-out party for Zune VideoX. A source describes that project, which allegedly is being headed by Joe Belfiore, this way:

Zune VideoX is "a Video store that bridges Xbox, Windows, Zune and Pink (the consumer services, including music, that will be adjuncts to certain Windows Mobile phones). He (Belfiore) is taking the successful Xbox video business and now trying to make that a core part of E&D (Entertainment & Devices).

"The reality is that Apple owns the music content locked in an iPod and now an iPhone. They realize that they won't change user habits with music. So, Microsoft actually has a lead on video" and is trying to capitalize on it.

Go back to Microsoft's original, February 1 press release. Here are the four reasons Ballmer said they wanted Yahoo:

• Scale economics driven by audience critical mass and increased value for advertisers
• Combined engineering talent to accelerate innovation
• Operational efficiencies through elimination of redundant cost
• The ability to innovate in emerging user experiences such as video and mobile

The No. 1 reason Microsoft wants Yahoo is for "scale economics" for advertisers, a k a more ad inventory across all kinds of platforms. Is that worth $44 billion (or, likely a few billion more, if current negotiations pan out)? Seems awfully pricey, even if the rosy online-ad market projections pan out....