My Take on Yahoo! / Microsoft

My first reaction to the news that Microsoft wants to absorb Yahoo! was “of course.” After all, Microsoft has not managed to stop Google from becoming the only technology player that matters. Microsoft has not stopped Google from becoming the only player whose strategy is the center of the universe. Microsoft held the coveted position as the company around which everyone planned his strategy for two decades. Now it’s Google. Venture capitalists, investors, content providers, advertisers, businesses, and technology firms plot their courses around Google’s trajectory. This must really annoy Microsoft! More pragmatically, Microsoft needs a competitive search marketing/advertising offering. There’s a lot of money at stake. There’s brand at stake. There’s mindshare at stake. Search has become the starting point for all network interactions. Microsoft can’t afford to cede that first point of user-contact to Google. It’s worse than losing the browser wars. People search from their mobile phones, from their PDAs, from their cars, from their phones, from their TVs. 

My second reaction to the Microsoft/Yahoo! take-over bid was, “oh no!” This is not good for customers. Having fewer choices never is. Having Microsoft—an already untrusted behemoth as our alternative to Google—(can we trust Google not to spy on our every move?) gives us two “big brothers” from which to choose and fewer alternatives. I immediately began thinking about white knights. Barry Diller, Rupert Murdock, John Malone all came to mind—so did eBay, Amazon, and Apple. I was intrigued that Google stepped up to the plate and offered a helping hand to stave off Microsoft. “Come partner with us, the way that AOL has done, and we’ll help you keep the green giant at bay.”

My third reaction was that, if Microsoft and Yahoo DO merge, they’ll need a new brand. They need a trusted brand identity. This need to re-brand for the mass market could precipitate the splitting up of Microsoft into two separate businesses: Microsoft, the consumer business (Yahoo/MSN and Xbox and Microsoft Live consumer software as a service), and Microsoft, the enterprise business (office applications, server software, and distributed systems). The only consumer products that have really won the hearts and minds of customers are the Xbox gaming products. It’s the one area in which Microsoft’s brand is very strong among consumers. X-Yahoo! could become an interesting, trusted brand and help Microsoft expand beyond the restricted confines of the business software market. I remember sitting in Bill’s parents’ living room, while he and Steve B. talked about strategy to a handful of industry analysts over a decade ago. They depicted Microsoft’s world as two concentric circles. The first one—which they dominated—was the business software market. The second one—which they coveted—was the consumer software and services market. They made it clear back then that they would spend any amount of money to keep trying to break through the barrier that separated the business software market from the consumer software and services market. Eventually, they said, we’ll get it right. At the time, they had MSN and no gaming products. That was also before search became the killer app. Search turned out to be the tidal wave that breaks down the barriers between business software and services and consumer behavior and consumption. Microsoft is still in search of a consumer strategy that will expand its market potential. Buying Yahoo! is a no-brainer and a good use of Microsoft’s cash. 

From Yahoo’s perspective, the board will probably hold out for a higher price and will probably get it. As of this writing, it doesn’t look as if any white knights are rushing to Yahoo’s side. Few firms have as much at stake as Microsoft in battling Google for the hearts and minds of the world’s consumers and advertisers.

NAME THAT COMPANY/BRAND!!!

What’s your nomination for the new brand identity?? An Xbox goes to anyone who correctly names the new combined Microsoft/Yahoo entity!

MY VOTE(S) FOR THE BEST COMMENTARY ON MS/YAHOO! DEAL

There's been some great thoughtful commentary about the MS/Yahoo! take-over bid. Among my favorites are Andrew Ross Sorkin's (NY Times) column on the Art of the Bear Hug! His description of this bit of take-over etiquette, had me laughing out loud over my breakfast paper:

"One part Emily Post and two parts Machiavelli, these oh-so-cordial notes are sent by unwanted suitors in an attempt to broker a peaceful deal. But they always carry an implicit threat: Rebuff this advance and you’re in for a fight.....Some bear hug letters are kept from public view and are sent in confidence, in hopes of bringing a company to the negotiating table. Those are known as teddy bear hugs. But others, like Mr. Ballmer’s, are written for public consumption. Those are known — less politely — as grizzly bear hugs"....

Ballmer's letter read, in part: “Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities,” .... “We hope that you and your board share our enthusiasm.”....

"It’s all a lot of high-priced theater. Companies might as well take out ads in the papers with the headline, “Fair Warning: We’ve Just Put a Price on Your Head.”"

Another commentary I particularly liked was Mark Anderson's pragmatic take. In his SNS Blog on the subject, Mark said:

"What else can MS do with its cash hoard that will earn it more money? Not put it into stocks, or cash, or buy back shares. MS has become a cash generation machine, and one of its greatest challenges is the efficient use of cash....It doesn’t matter, in the short run, whether MS can get Yahoo to beat Google, which is what all the pundits seems to be locked into discussing. What matters is whether the buy makes sense for MS, i.e., whether this will lead to a better use of cash, and increased earnings. I have no doubt the answers to both are Yes."

The first commentator out of the blocks who caught my attention was Fortune's David Kirkpatrick, with his piece: "Why Microsoft's Yahoo! bid Makes Sense". David was among the first to point out that balancing Google's hegemony with a strong competitor is good for all:

"Wonderful as Google is, the world and the entire Internet and media industry needs for its power to be countered and, if possible, matched. Without genuine competition everybody loses. That's what drives innovation. Even Google may benefit because if its share of search and online traffic grew much larger regulators would almost certainly begin to find ways of restraining it."

For a somewhat contrarian view, and one which says we haven't seen the end of this, my favorite is the perspective offered by Trip Chowdhry an analyst with Global Equities, summarized by Dan Farber and Larry Dignan on ZDNet's Between the Lines blog.

"Chowdhry’s writes that Microsoft's bid may be a preemptive move to prevent an Amazon-Yahoo merger. She speculates:

Contacts tell us that Yahoo has been probably thinking of shutting down its E-Commerce offering and forming a business tie up with Amazon.com, where users could create their own Merchant Stores - similar to what Yahoo did with shutting down its Music store in favor of Real Networks Rhapsody. Contacts feel, it is likely, that these discussions could be taking a form of Amazon.com and Yahoo merger, which Microsoft probably did not like.

A year ago, I’d dismiss this Amazon-Yahoo idea as nuts. Even now it’s a bit hard to believe. But given Amazon’s move into content–DRM free music and its acquisition of Audible–a Yahoo acquisition may not be so nutty.

An Amazon-Yahoo deal would have been a disaster for Microsoft since the high-risk purchase of Yahoo is the only way the software giant can compete with Google in search. Chowdhry recommends that Yahoo hires a few game theorists to work through the possibilities regarding the Microsoft bid. May the games begin."

This scenario tickles me. Of course Amazon couldn't match Microsoft's war chest. But a Yahoo/Amazon combo does make sense...except for the face that competing retailers would be loathe to spend money on an Amazon/Yahoo advertising platform.

 

Comments

[Patty Seybold]

OK--Rupert Murdock to the rescue?? A Yahoo!/MySpace/Wall St. Journal and many other newspapers consortium DOES make sense...but the deal currently being discussed is a joint venture--nothing immediate in it for Yahoo!'s disgruntled shareholders...

Once a company is "in play"...it seems to me that it's hard to remain independent.. (although Intuit managed to survive a near-merger experience with Microsoft).

I still favor an independent Yahoo!...They have a strong brand and a great set of properties and services...The challenge of rebuilding and focusing the company, however, has apparently eluded Jerry Yang's team. Rupert may be thinking that Yahoo! knows better how to monetize social networking than MySpace has done to-date. But will Yahoo!'s shareholders accept anything short of a merger??