When You Write An Article About Network Effects In Tech…

You lose cred if you don’t quote  or discuss Katz and Shapiro.  Personally, I think scale does matter significantly, but I think Microsoft has enough traffic to work with at this juncture (pre Yahoo) and I don’t think they need to pay a premium to gain more.

Also, you need to understand that there are two different systems involved here– the algorithmic search system and the paid search system.  I believe the network effects in the former are much greater than in the latter.  This distinction isn’t made in the original article, but it should have been since quotes such as this are used:

“It is well understood,” Mr Nukala said, “that as pCTR estimates improve, the quality of ranking is better, which leads to higher revenue per search.”

via Behind Microsoft-Yahoo: The Online Economics of Scale – Bits Blog – NYTimes.com.

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