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February 4, 2008

Some Thoughts on the Microsoft Proposal to Buy Yahoo!

Friday's announcement of Microsoft's $44.6 billion offer for Yahoo! shook the tech world.  Not so much because it was unthinkable.  Pundits have worked that one out from time to time in the last year.  The surprise was that Microsoft finally pulled the trigger on the offer.  A drop in profits at Yahoo! and statements that 1,000 Yahoo! employees are going to lose jobs showed that the company is in trouble compared to Google.  Microsoft clearly is exploiting the weakness Yahoo! is exhibiting to get the shareholders to sell out.  Yahoo! has been resisting these moves since the initial rumors started over a year ago.

Many articles out there talk about respective market shares for search in the realignment.  Google has about 65%, and a combined Microsoft/Yahoo! company would have around 30%.  Microsoft on its own hovers in the low teens no matter how many times they relaunch and rename Windows Live Search.  Yahoo! has steadily lost ground to Google in spite of traditionally being the destination of choice among web users.

So the first question that comes to mind really is can a combined company really grow the search business when they couldn't compete with Google as separate companies?  Google clearly has been the target for both business.  But what strategy other than size is there?  If Microsoft can afford $44.6 billion to buy market share, one would think they could afford investment in search beyond what their market share belies?  The problem doesn't seem to be money. 

The same question goes for Yahoo!  Perhaps they have less money than Microsoft, but their focus has mainly been search until they decided to try and be all things to all people.  One would think they would feel the pressure to monetize visitors and search queries and have the in-house expertise to do it.  Apparently not, when to Google has entered the lexicon as a verb.

Then there is the question of what a combined company will look like.  Microsoft has said there are at least $1 billion in savings via the merger by cutting out duplicative departments and services.  How that affects the user base is going to be anyone's guess.  Consider that some people visit Yahoo! because it is a brand worth visiting.  Some of those visitors go there because Yahoo! isn't Microsoft or Google.  That may or may not be a significant part of the Yahoo! user base.  Changes to services and fees as a result of the merger may have more of an effect on whether some of those users stay.

Then there is the target of the merger:  Google.  They are fighting the merger on two fronts, one by raising the standard tactic of regulatory concern and the other by talking to Yahoo! as an alternative partner (though apparently not a merger partner).  It had to take a court case to get Microsoft to change some of its business practices.  Raising the market practices issue here is ironic as Microsoft is characterized as sowing fear, uncertainty, and doubt when it attacks a competitor.  See Microsoft's complaints that Google would have control of the largest personal information database for web users by purchasing DoubleClick.  As a failed suitor for DoubleClick, would Microsoft be the better steward for that same information?

Google talking to Yahoo! is interesting not just as an alternative to Microsoft, but from a regulatory perspective.  There is more to web services than search.  If search were all that mattered, Google would have a competitor that still would be no where near it in market share.  But there is more to web services than email.  There are the relative advertising markets where Google overwhelmingly leads in text ads, but Yahoo! and Microsoft lead in display banner ads.  There is email, instant messaging, music stores, shopping, personal services, and a host of social applications.  Regulators are likely to take a long look at the implications each of these may have on a combined company in their respective service markets.  It's not so cut and dried in spite of Microsoft's hope to complete the merger this year.  As global companies, they will need many regulatory authorities to sign off on the deal.

This deal may go through, but it's not going to be easy, even after it concludes.

February 4, 2008 | Permalink

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