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Microsoft + Yahoo the Only Counter-Google Combination that Makes Sense? (The Force is Strong in Another One)

Posted by Bob Warfield on February 4, 2008

Microsoft’s unsolicited bid for Yahoo sure has the blogosphere working overtime.  There are lists of what products will stay or go.  The answer is that those products that are aligned with Microsoft’s strategic intentions and are not redundant will stay, but they will have to be rewritten to fit those strategic intentions in Microsoft’s de riguer .NET tool set.  Some of the key questions and thoughts boil down to:

- Email is really big for Yahoo.  But how does their cloud computing offering square with Microsoft Outlook and the Exchange business?  I’d hate to deal with just the meetings that will be required to decide who will be in charge of the overall Microsoft E-mail efforts and what trade offs will be made.  You can count on some eggs being broken while that omelette is made.

-  The Email question is just the biggest piece of an overall question:  Will Microsoft use Yahoo to accelerate a move into the cloud, possibly weakening some of their existing desktop software, or will they stick to their guns?  ZDNet says ask Ray Ozzie, who has been making the right cloud noises, but Microsoft is extremely adept at talking the talk while walking a completely different walk.  Jeff Jarvis puts it well, “I’ll bet that Microsoft is just as likely to destroy as to exploit what it gets from Yahoo. That is often the history of these takeovers, when a company tries to buy the strategy it doesn’t have: AOL and Netscape, Time Warner and AOL, Yahoo and Broadcast.com, and on and on.”  I’ve seen several of these from both sides, and what is about to happen is a collosal tussle of personalities and ideas.  It gets very emotional, very aligned with interpersonal issues, and often will not make much sense after it’s done.  Anything can and will be rationalized in the heat of battle.

-  I think OpenID will be a great test question for how the new behemoth will operate.  If they unconditionally adopt it across all Microsoft + Yahoo properties, that’s a good sign.  If they weasle at all, that’s a bad sign.

-  Microsoft has likely made their business case on the idea that advertising and search synergy pay enough to make the deal worthwhile.  The rest is just icing on the cake.  Don’t look for them to exercise too much care preserving every last bit of the icing.  Some products will die.  It will be done quietly, but it will be done.  Customers will wake up one day to discover it’s over for their product, and I’ll bet very little warning will be given.  It’ll take at least a year even to sort through it all and decide.

There are discussions about how Google and others can and are trying to block or slow down the shotgun wedding:

- Scott Schnaars recalls how Microsoft spent tens of millions of dollars hiring the key talent away from Borland.  This was a little while after I left Borland, but I remember the exodus of talent, and it was truly debilitating when people like Anders Hejslberg left the Delphi group to go to Microsoft and build things like C#.  It’s a lot cheaper to drain talent this way than to beat Microsoft’s $44B offer, but I wonder if it would be as effective with Yahoo?  I’m not saying they don’t have talent, but it isn’t clear there are key people aligned with a few key offerings that matter enough to do harm if the people are snagged.  So I don’t think it’s worth making truly ridiculous offers, but it is probably very worthwhile to make generous offers if companies see valuable talent that is already unhappy about going to work for Microsoft.

- The anti-trust argument is fascinating.  On the one hand, Google couldn’t buy Yahoo without falling prey to monopolist complaints.  On the other, Microsoft claims this is good for competition, but there is potential fallout.  Cote worries about the impact on Firefox versus IE, for example.  Make no mistake, Firefox is out and IE is in at MicroHoo.  Nicholas Carr puts it well when he says that when Google adopted “don’t be evil” as the cornerstone of its corporate code of conduct, what it really meant was “don’t be Microsoft.”  That’s really the fear many have, and they are right to be afraid.  Soon Yahoo, a very decent company on the “don’t be evil” scale will be a tool of Microsoft.  OTOH, Read/Write Web’s poll indicates most people see this as fear mongering and not a real monopoly threat.  In their view, Google can’t claim to be David to Goliath.  While Google is no David, you have to laugh at Microsoft’s claims that it is the saviour of openness

- There are strategies Yahoo could pursue.  It could tie up its search business inextricably by making a deal with Google that can’t be broken.  Remember Peoplesoft’s deal to allow customers to get all their money back if support and new releases for products were dropped?  Similar thinking.  Didn’t stop Oracle or even slow it down much.  Find another suitor?  News Corp, Apple, Private Equity, eBay are all mentioned.  The problem is that Yahoo is more valuable to Microsoft than any of these, and MSFT is well-equipped to pay more.

Of course there is also a large contingent that say this acquisition isn’t the next big thing, which is where I’m at.  One of the funniest is Fake Steve Jobs’ “Monkey Boy’s Three Legged Race.”  Those that think this acqusition is no threat to Google at all wonder why Google bothers to fight it at all.  In fact, if, as many have said, it is good news for Google, why not encourage it?  In this respect, Scoble has it exactly right in terms of what Google is doing.  The reason the deal is good for Google is because these mergers are so messy.  Nothing gets done for a long time.  Key people leave.  Those that stay spend way too much time thinking and talking about it no matter what Jerry Yang tells them.  If Google can prolong and deepen the uncertainty, it compounds this effect, even if the deal goes through.  Google has little to lose playing this time honored game, and potentially a lot to win as each day devalues the transaction.  Henry Blodget maps out what a disaster this deal can be for both companies, from the pre-deal purgatory Google wants to extend to the idea that Microsoft is ill-prepared to start fighting yet another way.

While I do think the deal is not the best news for Microsoft, and is good news for Google, others are very much afraid the deal is terrible for Silicon Valley in general.  There is concern that a Microsoft+Yahoo marriage eliminates a prolific acquirer and could thereby put a damper on the Internet startup game.  Bill Burnham’s post on why the merger is bad for Silicon Valley is probably the seminal essay on the topic, but Fred Wilson takes up the refrain as well.  The last time the bubble burst, VC returns never did come back and there has been a dearth of seed funding from VC’s ever since.  While VC’s often seem to have an almost pathological need to find something to worry about, this one is interesting. 

On the one hand, it’s hard to imagine that so many Internet startups have been counting on just one company like Yahoo to make it all worthwhile.  Can the loss of one player really close down the party?  On the other hand, as was pointed out in the articles I mentioned, part of it was the competition between the big giants that drove up valuations.  The other thing the analysis overlooks is just how prolific an acquirer Yahoo can afford to be if it continues independently.  These guys are at the point of sharpening all available pencils.  Yahoo Music Unlimited, for example, is being shut down and traffic redirected to Rhapsody.  More of that sort of thing will follow regardless of whether Yahoo is acquired.  Fred Wilson points out that people were already starting to leave Yahoo’s services like Flickr and Delicious and MyBlogLog.  The Microsoft thing is just the wake up call telling folks its time to smell the coffee.

Dare Obasanjo asks if you ran Microsoft and didn’t like the Yahoo deal, “What would you do instead?”  I’d buy Amazon if I could.  I think it is a much more interesting play.  Yahoo isn’t strategic, it’s market share.  Traffic, in other words.  There is not a single jewel in Yahoo’s crown that is really strategic.  Yes, they can help grow Microsoft’s search business and portal businesses, but it’s very tactical.  The most likely strategic move would be to place a big bet on Yahoo’s cloud email over Outlook+Exchange, but I have a darned hard time seeing that.

But where did this Amazon thing come from?  I think Amazon is the next up and comer on the web in terms of big scale.  Huh?  That’s right.  Here’s why if Microsoft wants to own a big web property and a strategic one at that, they should buy Amazon:

They own a hugely valuable search franchise: shopping

You want search?  How about shopping search?  Now imagine feeding additional traffic from Microsoft’s other venues through that.  Now add to that even more traffic because Microsoft could afford to buy Amazon as well as Yahoo.  One of the reasons search is so important to advertising is because people often search just before they buy.  An ad picked up during that important period is much more likely to influence behaviour than an ad that runs while a user isn’t even thinking of buying, for example when they’re watching a funny YouTube video.  But Amazon is a search engine for many many e-tailers.  If you are on Amazon you know folks are ready to buy.  Yes, it’s more cosumery and less technie than we think of Microsoft, but it would be a very valuable addition to their empire.  And, according to Compete.com, Amazon gets nearly as many visitors as MSN.com each month.  The difference is these people are all shopping and presumably ready to spend money.  No wonder Amazon’s market cap is higher than Yahoo’s was before Microsoft floated an offer.

MicroZon is geographically proximate and easier to digest in every way

Hey, both companies are in Seattle.  Amazon does not consist of a million little unrelated divisions that were once separate companies that got poorly glued together.  Amazon does not have a disaffected staff that was already in the process of walking out the door.  They are not being run by a founder that was off on vacation while a technophobe ran the company for years.  They are a healthy entity that could be brought in relatively undisturbed as a division at Microsoft.  Yahoo will require a massive amount of surgery, some tissue will die, and other tissue will have to be removed.

Google can’t just absorb the value by attrition

Nothing about combined Microsoft + Yahoo will stop the attrition that’s been going on for years.  In fact, many think a merger will accelerate that attrition.  Google’s got nothing going on that competes with Amazon.  They’d have to scramble to think of something.  Meanwhile, the franchise can be brought over intact and likely made to grow even faster.

I saved the best for last:  Amazon Web Services

There is no better way for Microsoft to own a huge piece of the future of Cloud Computing than Amazon Web Services.  It does not require all the hard business cannibalization questions that things like E-mail or other office apps in the cloud bring.  It is a fabulous SaaS model.  It is strategic because it is an operating system in the clouds.  Google has not yet been able to unveil a competitor so Microsoft steals a huge lead.  In one fell swoop Microsoft can gain a fantastic start on the operating system position its used to having on the desktop, only this time it happens in the Cloud, which is the Future.  What’s that?  You wonder how big Amazon Web Services really is?  Guess what, they just announced the traffic to web services is bigger than the rest of Amazon’s offerings.  Let me quote Read/Write Web because this is huge:

web services bandwidth now accounts for more bandwidth than all of Amazon’s global web sites combined. To put this in perspective, comScore ranked Amazon the 7th most visited site in the US in December. The retail giant was 6th in the UK, 9th in Canada, 11th in Germany, 11th in Japan, and 20th in France. In other words — Amazon is big, which means AWS-powered sites must be really big (collectively, at least).

Adoption of Amazon Elastic Compute Cloud (EC2) and Amazon Simple Storage Service (S3) continues to grow. As an indicator of adoption, bandwidth utilized by these services in fourth quarter 2007 was even greater than bandwidth utilized in the same period by all of Amazon.com’s global websites combined.

As TechCrunch’s Erick Schonfeld points out, “That means startups and other companies using Amazon’s Web-scale computing infrastructure now bigger collectively than Amazon.com, at least as measured by bandwidth usage.”

On top of the interesting scale, momentum in a strategic direction, and other tasty reasons to look at Amazon, we have that it is readily monetizable.  These guys sell servers!  There is real money there, folks.  More all the time.  AWS is the big fat iceberg that holds up the tip we think of as Amazon the book and music e-tailer. 

Amazon would have been a better bet for Microsoft than Yahoo,

and it may turn out to be a better bet for Silicon Valley too.  At some point, Amazon will start acquiring like crazy too.  They’re doing some acquisiton, but imagine how easy it is for them to acquire companies that built on Web Services.  This could be the business model the Harvard B-School kids are reading about for years to come.

But the really scary scenario is:  GoogleZon

That combo would pretty much own Cloud Computing.  The amazing thing is it even looks to me like it should pass anti-trust, whereas GoogleHoo wouldn’t.

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3 Responses to “Microsoft + Yahoo the Only Counter-Google Combination that Makes Sense? (The Force is Strong in Another One)”

  1. Great post. This is a good one to save and digest..

    I think that this deal may actually propel the web 2.0 startups..in war time startups can be nimble and develop those arms.. there will be many opportunities for startups to be arms dealers to accelerate the acquistion and have market making solutions for one of the two titans

    John

    http://furrier.org

  2. […] come with scale.  Don’t be surprised if there isn’t more news at some point.  My own personal suggestion was that Amazon would make a better acquisition than Yahoo for a variety of reasons.  After all, […]

  3. Good idea on bringing Amazon into the (former) MicroHoo story!

    Another possibility is that Amazon invests in applications by buying Salesforce.com. That would give Amazon a platform for ISVs to use rather than just offering (virtual) bare EC2 servers.

    Interesting times…

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