MicroHoo, and Non-Peeing Sections in the Internet Pool

As much as I believe that Microsoft needs to do something major, and as much as I have predicted that it would put Yahoo in play in 2007, the idea of Microsoft trying to buy Yahoo, while in a sense inevitable, is still desperately difficult. The two companies’ cultures are different, as people keep yammering, but you could say that about Microsoft and pretty much any other company — Microsoft is an anomaly in an industry of anomalies — and so culture is not the real issue.

The real issue has to do with size and experience. Bringing off multi-line acquisitions of this size — call it $50-billion and 11,000 employees, against Microsoft’s $293-billion mkt cap and 71,000 employees — is always tough, and Microsoft, while a relatively profligate small acquirer, doesn’t have material large dealing experience to point to. It can do the deal, in other words, but the subsequent carnage may be something to behold — which Google might actually end up applauding.

[Update] Some people are saying that Microsoft needs to spin out its “Internet” business and combine that with Yahoo. Newsflash folks: This is 2007, every technology/software business is an Internet business. If you want to make the argument that MSFT needs to carve out media and advertising then make it, but don’t conflate media/ad with Internet and pretend the latter still remains a distinct category, because it doesn’t.

Pretending there are are Internet and non-Internet aspects to a tech company like Microsoft is like pretending you can have peeing and non-peeing sections in a swimming pool. It doesn’t work.

Related posts:

  1. Non-Peeing Section of Swimming Pool
  2. Bullish Sign for Tech/Internet Stocks
  3. “You’re an idiot if you don’t start an Internet company right now”
  4. Ads and the Internet
  5. Heavy Internet Users are Different

Comments

  1. Paul you look like you nailed it. I too am skeptical because I am not sure how culture and branding are going to work. My sense is that msft wants to create a strong number 2 in advertising and establish pricing power at the top– make the playing field less competitive. It doesn’t make sense to me but Ballmer Gates Ozzie do think things through. Semel will go and Decker, who’s star is on the rise, would run Yahoo imo. The synergies here are in data centers bandwidth server infrastructure, etc.

  2. Agreed about both Decker and Semel. And agree, as well, about where some real synergies are here, include infrastructure, but if it doesn’t pass the topline test in search/ads it can’t be worth doing.
    Nevertheless, as I said on-air a month or so ago, and have said here a couple of times, it was inevitable Yahoo be put in play, highly likely it happen this year, and at least as likely that it be Microsoft that did the deed. Some Microsoft see it as sufficiently strategically important that it outbids any potential PE acquirers likely to show up? Good question.

  3. alfeche says:

    a few points:
    i don’t view the cultures as that different. i have spent time with a lot of people from both companies and i find the differences to be not that overwhelming. cultures are always different but these two aren’t extremes.
    someone please remind me why microsoft needs to participate in this space in the first place? i utterly reject the premise that microsoft needs to be concerned with this space at all. if they simply want to grow more, then fine. but as it stands what google does and what microsoft does are vastly different despite what blogger prognosticators would have us believe.
    the deal makes no sense. microsoft brings nothing to the table that yahoo doesn’t already have. so where are the synergies beyond eliminating a lot of their live.com expenses?
    microsoft has an abysmal record of acquisitions within the last 5 years. i have been involved with some of them. their due diligence and corp dev group is among the most incompetent i’ve ever seen. the headcount reductions should occur on the MSFT side but they will occur on the YHOO side.

  4. Bruce Hamm says:

    What is being overlooked here is the vertical side of the business (e.g. Autos category) and the display business that supports it. A combination would make MSFT-YHOO #1 in UU (by a WIDE margin) in almost every vertical – from sports to health to finance to news to entertainment content. It would be a must buy for all advertisers and command premium pricing. It also means reasonable leverage on the cost side with leverage on many of the same suppliers (e.g. AP). This strategy requires operating MSN and Yahoo as distinct and separate brands (which makes sense as they serve different audiences today). The leverage is in the sales story across both not on the changing the front end UX (after all users have made their choices today whether to use Yahoo or MSN; it would not make sense to scuttle those user bases).
    Additionally, with their communication services footprint (think Yahoo IM/MSN-WL Messenger) they would have the abillity to look at Web-wide behavior and lay the foundation for behavioral marketing at scale, which would then allow them to increase yield on all the use where there is no context to lift pricing today (so an ad served in IM or Yahoo Mail lifts from $1 to $5 and beyond. This revenue ramp – which only comes from the combinatio – is real and significant.
    There is a ton of thin analysis around the search battle (every share pt is roughly $100M), but it is the display opportunity that is equally interesting here (as it is 40% of the overall on-line ad market). And the capper on this is once you get good at raising the yield on display, you then have further justification to roll up other sites and services that have high use vs. renting traffic. It sets the stage for long-term growth.

  5. stevo says:

    please tell me how you raise the yield on a cpm product?

  6. Richard Ball says:

    If the goal of the merger is to create a viable alternative to AdWords then building a single platform through a joint venture might be more effective. Combine the best of AdCenter and Panama in a back-end PPC advertising platform that both Yahoo! and Microsoft can use on the front-end. I don’t think you need a merger to accomplish this. Hmm, remember when both Yahoo! and Microsoft used the Overture platform? ;-)

  7. dave mcclure says:

    Paul -
    i agree & disagree about the internet vs non-internet aspects of Microsoft:
    * i agree, every company needs to have an internet strategy. altho Microsoft is a behemoth and stumbling here & there, like Yahoo they have a pretty large audience with MSN/Live properties that is still quite viable.
    * however, also like Yahoo, MSFT is sucking wind at growing its share of search and monetizing all the eyeballs they currently get. they could benefit from combining efforts or at least reducing costs here.
    while both companies already have sunk costs in their respective ad systems, they could still benefit from combining their market share in page views & search advertising, and reduce overhead costs. this is more of a consolidation move, but still likely makes sense, regardless of whether it happens via Yahoo-MSFT acquisition or more appropriately Yahoo-MSN merger / spinout. tough job, but not impossible.
    anyway, this deal if it happens is a lot more about MSFT figuring out how to compete with Google than Yahoo competing with Google. the deal should be analyzed entirely from MSFT’s perspective i think.
    - dave mcclure
    http://500hats.typepad.com/

  8. dave mcclure says:

    btw, love the “peeing / non-peeing swimming pool” visual. as a recent father of a 2-year-old & a 3-month-old, i really get that analogy ;)

  9. telljeeves says:

    “they could still benefit from combining their market share in page views & search advertising..”
    Every analyst is saying this too. No one is explaining why. As an advertiser do I really give a crap about who has how much marketshare? I spend most of my money at the company with the best ROI. I maybe throw some money to the other side so I don’t have my eggs all in one basket. Market share has nothing to do with how and advertiser thinks about where to place ads.

  10. Eric says:

    Microsoft doesn’t need to spin out its internet business; it needs to spin out its operating system business.
    The problem is Windows is their cash cow – they’re afraid to do anything that would undermine or disrupt that, so instead competitors are doing that – that’s why their online offerings suck. If you cut away Windows, they’d all behave differently. Meanwhile the Windows group could just focus on creating a stable, secure product with an emphasis on the user experience without being pressured from other product divisions.

  11. Joe says:

    I agree with Eric and have championed this idea for years. I believe the pressure from other parts of Microsoft do more harm to Windows, than the other way around as is often claimed. (The developer tools, for example, are now being completely compromised by influence from the application divisions.)

  12. Marcus says:

    I think this Merger is like GM buying Honda. Yeah, I know, MS isn’t GM, they’re a profitable company, it isn’t a direct comparison.
    BUT
    You have a company that hasn’t been able to make money online for going on twelve years now, buying a company that is quite good at making money online. Yeah, Yahoo may not be the growth story Google is, but they’re still a Fortune 500 company that rakes in a few Billion a year in profit.
    What does MS have to offer them? The opportunity to merge their online operations with one that leaks money like a Sieve, that is run by people who have been a failure at making money via online advertising and services?
    So back to my original analogy, you have a company that is god awful at something, buying a company that is good at something.
    I know MS culture VERY well – if MS buys Yahoo the following will happen:
    The analysts who confuse MS’ ability to sell Windows and Office, with solid Management skills will cheer the merger, sending shares up significantly over the next 12 months.
    - They’ll muck-up the integration of the two companies. Integration of two companies Data Centers and infrastructure will go particularly bad.
    - They’ll try to show Yahoo the “MS Way” instead of listening to the company that has succeeded at something they’re terrible at.
    - They’ll attempt to replace “Yahoo Stuff” with MS stuff, sort of like GM putting the word Honda on a Pontiac and expecting it to sell like an accord…or just putting GM parts in a Honda.
    - Key Yahoo leaders will leave in droves
    - 18 Months from now, the cheerleaders will wake-up and pronounce the whole thing a disaster.
    From my perspective, there is nothing in it for Yahoo aside from the shareholders making some money by selling their shares for a premium.
    Incompetence, buying moderate strength = marginal incompetence.
    The only way I could see this possibly working is if:
    - MS kills the MSN/Windows Live Group
    - Replaces the above with Yahoo
    - Let’s Yahoo operate independently
    - Yahoo uses the MS deep pockets to drive innovation in their existing business. By basically hiding Yahoo within MS, the Yahoo crew can stop worrying about quarterly earnings and make long-term future investments.
    But we all know that’s not going to happen.
    Instead, this is like Honda merging with Pontiac.
    -M

  13. franklin stubbs says:

    So, umm, not to put too fine a point on it: if Microsoft and Yahoo were both kind of sucking before the merger–Vista revenues notwithstanding–what magical property is supposed to make their suckiness decrease once thrown together?

  14. I think two questions are worth asking…
    1. In a merger what new services or products will be created to serve new customers?
    2. If there are no new services and new customers to be created by the merger, is the deal really being constructed to prop up a weakening business model?
    Beware that most mergers fail because of these points. Talk of culture is a side-issue because it has little to do with customers.
    Mike
    http://www.OnDisruption.com

  15. Andi says:

    Purple blood will flow like water and Google will have even less incentive to improve their search product.

  16. Joshua Karp says:

    I really don’t understand why Microsoft would even consider buying Yahoo. Google (and Yahoo) gets its revenue from advertisements – are we really saying that the future of our industry – a technology industry – is in the hands of the people who advertise / market products???
    To me, Google is a large product catalog with a number of interesting features. Don’t get me wrong, I like and use Google, but Microsoft has *products*. Products that are used to run industries. Google is used to find web pages. How can there be a comparison?
    If Google had chutzpah (and they very well may), they would be building an OS. Then, would see if they could stand in the tall weeds with the big dogs. Until then, it doesn’t make sense to me.
    Microsoft has the tools to succeed internally, and they have time and cash on their side. The Yahoo discussion will never materialize into anything.