Feb. 6 (Bloomberg) -- For the first time in four years, Google Inc. is feeling the heat of potential competition in the proposed combination of Microsoft Corp. and Yahoo! Inc.

Microsoft's $44.6 billion bid for Yahoo may slam another door in Google's so far unsuccessful attempt to expand beyond the four- line text advertisements that run alongside Internet search results. That's because Microsoft and Yahoo would control more than a quarter of the market for animated ads and colorful display banners at the top of Web pages.

With growth slowing in the market for text ads, Google set its sights on display and multimedia ads, where total U.S. sales will jump 60 percent by 2011 to $13.7 billion, according to researcher EMarketer Inc. Google has relied on search-linked ads for almost all of its $16.5 billion in annual sales and the sixfold increase in its stock since August 2004.

``Even though Google may be looking forward and seeing this world where they own online advertising, at this point they're really only owning one flavor,'' said Jon Gibs, vice president at the research firm Nielsen Online in New York. ``They really are going to be facing quite a giant in the other part of the display ad universe.''

Google shares have tumbled 11 percent since Microsoft's unsolicited bid for Yahoo Feb. 1, to the lowest since August, on concern the combination will curb growth. Quarterly profit for the Mountain View, California-based company also trailed analysts' estimates.

Microsoft said it is pursuing Yahoo to challenge Google for online ad sales, a market that may double to $80 billion worldwide by 2011. In the U.S., search ads will account for 40 percent of online promotions, compared with 33 percent for display and media spots. Analysts predict display revenue will become at least as profitable as search ads and say it's growing faster.

Failed Efforts

Google has been the most-used site for Web searches since January 2004, based on Nielsen data. Chief Executive Officer Eric Schmidt has failed to parlay that dominance into new markets. He tried selling ads for radio and TV commercials, and newspaper classified spots.

With Yahoo slumping and Microsoft unable to jumpstart Web ad sales, it started to look as if Google might have an easy shot at up-and-coming parts of the Web: ads dished out to Internet pages shown on mobile phones and video promotions.

In addition to its popular homepage, Yahoo owns the Flickr photo-sharing site and HotJobs employment site. It attracts millions of users to its finance and sports pages. Those are locations for marketers to showcase their brands.

As of November, Yahoo had the biggest share of the U.S. display market with 19 percent, according to Reston, Virginia- based ComScore Inc. Microsoft was third with 6.7 percent, behind News Corp.'s Fox Interactive Media. Google had 1 percent.

New Leader

``When you put Yahoo and Microsoft together, what you get is a leader in display and branded advertising,'' said Jeffrey Donlon, who helps manage $18 billion at Manning & Napier Advisors Inc. in Fairport, New York, including Microsoft and Google shares. ``Yahoo brings some interesting content assets to the table that Google does not have.''

Yahoo hasn't responded to Microsoft's offer. Stanford Group Co. analyst Clayton Moran in Boca Raton, Florida, said Yahoo may seek a partnership with Google or a media company like News Corp. Yahoo Chief Executive Officer Jerry Yang told staff in an e-mail today that the board is still examining the Microsoft bid and other ``strategic alternatives.''

Yahoo's board is carefully evaluating the Microsoft proposal, spokeswoman Tracy Schmaler said. Spokespeople Matt Furman at Google and Colleen Lacter at Microsoft declined to comment.

Yahoo, in Sunnyvale, California, fell 41 cents to $28.57 at 4 p.m. New York time in Nasdaq Stock Market trading. Redmond, Washington-based Microsoft dropped 55 cents to $28.52. Google slid $5.09 to $501.71.

`Troubling Questions'

With display ads, Google can target Web users by placing banners and videos on other companies' sites. In some cases, marketers pay for placement and in others they pay when an ad is clicked.

Google has made moves into display and multimedia ads, with the $1.65 billion acquisition of the video site YouTube Inc. in 2006. Almost a third of all U.S. online video clips are viewed on YouTube, and Google sells ads in some videos. Companies including retailer Neiman Marcus Group Inc. and TV maker Royal Philips Electronics NV have rented out the YouTube homepage for a day.

Google followed by offering $3.1 billion for the display ad company DoubleClick Inc. in April, and has introduced ads with multimedia clips that show movie trailers and live news. The DoubleClick transaction is under review by European regulators. Microsoft opposes the deal, arguing it would give Google too much control of the Internet ad market.

No Oxygen

Microsoft's online revenue, mostly display ads, rose 38 percent to $863 million last quarter. More than 80 percent of Yahoo's $7 billion in annual sales come from online ads, and its display revenue rose 20 percent last quarter.

Google doesn't give figures for the search and display ad businesses. Credit Suisse analyst Heath Terry in New York says display and YouTube will contribute a combined $323 million in sales this year, or 2 percent of revenue, and will rise to $705 million, or 3 percent, in 2009.

``They're going to steal the oxygen from where Google is trying to grow,'' said Bill Gossman, CEO of Revenue Science Inc., a New York-based provider of targeted advertising.

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Elliot Blair Smith in Washington at esmith29@bloomberg.net.

Last Updated: February 6, 2008 16:19 EST