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Why Does Microsoft Really Want Yahoo?

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Daniel Eran Dilger
Microsoft finally went public with its $44.6 billion offer to buy Yahoo, following years of aggressive efforts to talk the company into selling out in private negotiations. Why does Microsoft want Yahoo so badly, why hasn’t Yahoo jumped at the deal, and how would such a merger work out for Microsoft, Yahoo, and the tech industry in general? History suggests some answers.

[graphic courtesy Alf: Microsoft se intenta quedar con Yahoo “por las malas” [Actualizado] | www.faq-mac.com]

En Português Brasileiro: Por que a Microsoft na verdade quer o Yahoo?
Traducción: Ubiratan Olivério


Why Microsoft wants Yahoo.
According to CEO Steve Ballmer, Microsoft’s interest in Yahoo is all about growing in online stature to rival Google while benefitting from shared costs and operational efficiencies. Ballmer’s open letter to Yahoo shareholders sounded suspiciously similar to Carly Fiorina’s giddily optimistic but ultimately disastrous plan to merge Compaq into HP.

“While online advertising growth continues,” Ballmer wrote, “there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence.” Ballmer specifically noted “synergies related to scale economics” would help the combined companies to compete in a market where “there is only one competitor at scale,” clearly a chair thrown in the direction of Google.

“Expanded R&D capacity” would “unleash new levels of innovation,” Ballmer continued. Using Microsoft’s definition of innovation, that would have to mean that the deal would be all about tying Windows and Microsoft’s other proprietary technologies to Yahoo’s online properties and services.

Ballmer also noted “operational efficiencies” as an upside to “eliminating redundant infrastructure and duplicative operating costs.” That means either lots of pink slips for MSN and a simple rebranding of Yahoo’s technology under the Microsoft label, or massive layoffs of Yahoo employees skilled in Unix and open source and a Hotmail-style transition of Yahoo’s systems to a Windows-powered infrastructure.

Lastly, Ballmer highlighted “emerging user experiences,” where he again repeated an intent to “drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms.” Ballmer is describing a replay of the “Windows Everywhere” of the early 90s, albeit applied to the web rather than office equipment and gadgets.

How Microsoft Innovates.
If Microsoft plans to convert Yahoo’s services into more “innovative” ones running on its own platforms and tied to Windows, wouldn’t it be easier to just develop it all from scratch? Why would Microsoft pay through the nose for Yahoo’s existing online businesses largely built upon FreeBSD, only to sack them or spend significant resources converting things to run on Microsoft’s platform?

In all fairness, Microsoft has long tried to build an “innovative” online and search business from scratch. The original MSN was a clone of AOL created in 1995 just in time to see the emerging open web topple the interest in proprietary online services. The next year, the company rapidly developed a new Internet strategy involving the purchase of Internet Explorer, and tying it into Windows to prevent any alternative open development platform from emerging.

After purchasing Hotmail in 1998 and embarking on a mission to develop a wide range of other Internet services under the reinterpreted MSN brand, the company still found itself unable to build a profitable business online over the next decade, despite all its efforts to leverage the Windows monopoly desktop platform.

The web had quickly established that there was no real money in pay per view content, nor in web site subscriptions, nor fee-based services. Microsoft’s huge investments in online properties had only served to prevent competition to Windows, not to build any real value or result in any new revenue sources.

Web Browser Wars

Apple and the Origins of the Web
Web Browser Wars: Netscape vs Internet Explorer

Google Builds A Money Maker.
In 1996, two Ph.D. students at Stanford University, Larry Page and Sergey Brin, developed a new search engine designed to evaluate search relevance based on how other sites linked to information on a page, rather than just scanning a page to see what words were on it. After hosting the new service publicly in 1997, Google quickly became regarded as the best way to search the web.

What Google lacked was the best way to make money from providing search services. That had been pioneered by GoTo.com, which also launched in 1997. GoTo developed a system that let advertisers bid on search terms to place their advertising as the top result for users’ queries. This worked well for creating a market for selling and presenting advertisements.

However, GoTo’s non-paid search results, which brought in the searching audience to begin with, didn’t work so great because they were based on simple web content indexing. Google copied GoTo’s bid for placement advertising to combine its own improved PageRank searching with GoTo’s new ad sales model.

Google’s unique contribution was to move away from the garish, annoying banner ads of the late 90s and replace them with relevant, subtle text ads that didn’t anger and annoy users. Because Google’s textual ads were actually relevant, users were initially less likely to ignore them in the way they had been subconsciously tuning out the increasingly desperate and irritating conventional banner ads.

GoTo, Overture, Yahoo vs. Google.
In 2001, GoTo renamed itself Overture. Following the dotcom bust, the new Overture struggled to compete against Google in ad sales. By 2002, Google had worked its way up to third place in online search behind Yahoo and MSN. While third in page hits, Google attained three times the average time period users spent in search compared to Yahoo and MSN.

The top two leading search engines’ hit numbers came, not from offering a good product that attracted users like Google, but because both Yahoo and Microsoft had signed agreements with ISPs to make them the default search site for customers. However, those customers were spending more time on Google’s site because they were actually using it, not just being presented with it as their default choice. Google was getting attention via word of mouth for suppling a better product for users, while Yahoo and Microsoft were cramming so much content and advertising into their portal sites that they no longer even looked like functional search engines.

Overture supplied the ads for Yahoo and MSN, so it was directly threatened by Google’s rapid gain in popularity. Overture responded to Google’s success by suing the company in 2002 for copying its patented business ideas of bid-for-placement ads and pay-for-performance search. At the time, Overture was still bringing in 2.8 times the annual revenue of Google.

While trying to compete against Google in pay for placement ads, Overture also announced a partnership with Gator spyware in 2003 that involved installing the spyware on users’ computers to record and report their activity. Overture also used the Gator spyware to pop up ads that it had sold from advertisers who thought their ads would be presented on reputable sites.

When advertisers began catching flack from consumers outraged over having their ads popped up over and under web browser windows, Overture’s reputation began to sink. The company was bought up by Yahoo that same year. Yahoo inherited Overture’s three year spyware contract headache and the company’s patent suit against Google. The following year, Yahoo settled with Google in an agreement that granted Yahoo 2.7 million shares of Google in exchange for a perpetual license to the Overture patents related to paid search, setting Google free to develop its position as the new first place provider of web search.

Gator Information Center
Google, Yahoo bury the legal hatchet – CNET News.com

Build It And They Will Come.
Google had entered a market dominated by two entrenched rivals and bested both by delivering a better product for consumers. That resulted in Google also being able to offer advertisers the most valuable audience. Four years later, Google services more than 53% of the web’s search, with Yahoo in second place with 19.9% and Microsoft in third place with 12.9%. Those numbers reflect the fact that Yahoo is bundled with AT&T Internet service and that Live Search is bundled with Windows. Google’s real share of the market for search is actually much higher.

Yahoo has struggled to maintain feature parity with Google, but has been unable to grow its revenues or profits. In 2005, Google reported $6.1 billion in revenue and $1.5 billion in net profits while Yahoo had $6.4 billion in revenues but only $751 million in net profits. In 2006, Google had boosted its revenues to $10.6 billion and profits to $3 billion, while Yahoo reported only a modest gain in revenues to $6.9 billion and a drop in profits to $660 million.

In 2007, Google continued to grow. In the winter quarter, it reported having boosted its earnings by 50% year over year and its earnings by 17%. Investors were still unhappy with its outlook, which triggered a stock selloff that plunged the company’s valuation, much as Apple’s best quarter ever with a conservative outlook was met with a similar panicky reaction.

Analysts, Investors Take Apple to Task For its Best Quarter Ever
Best Quarter Ever: a closer look at Apple’s record Q108 earnings

Build It Again And They Will Not Necessarily Come.
After building a revenue monster on top of its superior search results, Google discovered that it couldn’t neatly duplicate the effort in every arena. The company built its own Google Video alternative to YouTube in order to enter the promising world of attaching ads to amateur and public domain video content, only to find that it made more sense to actually acquire YouTube instead.

Microsoft similarly tried to beat YouTube with its own SoapBox, an offering that most people never even heard about, let alone evaluated using. The value of existing properties related to the potential for squeezing ad revenue from them has triggered a desperate bidding war between Google, Yahoo, and Microsoft to gobble up every online venue with a significant audience.

This effort is largely speculative and only optimistically hopes that advertising on these sites will someday turn a functional profit. Google is not pulling revenue from YouTube yet, and knows it can’t anytime soon. However, while Google is still pulling impressive revenues and profits from search placement it also knows it needs to find new markets to develop for the future. The struggling and increasingly desperate online services of Yahoo and Microsoft are even more aware of the problems they’ll face if they do not push ahead aggressively into new ad markets.

The New Search: The Old Ads.
Yahoo has been working to develop a web service portfolio, acquiring Flickr and del.icio.us and building out a music business. None of these has done anything to reverse the company’s backward slide, because developing a popular audience requires massive long term investment that often can’t sustain itself, even with ads plastered throughout.

With Google having largely tapped out the concept of pay for placement advertising and contextual ad positioning, the search business has turned back the clock to user tracking technologies remarkably similar to the spyware ads of the late 90s.

Last year, Google managed to snap up DoubleClick for $3.1 billion in cash, expanding beyond its core competency of pay for placement, and into the old world of cookie-tracked banner advertising that aims to be more relevant to users by following them around and taking notes about what they do. The old banner ads that Google replaced with its subtle textual links are now the new thing, because Google’s contextual text ads are not only being increasingly ignored, but also because their functional relevance isn’t often very good.

Microsoft and Yahoo complained to the FTC about Google’s DoubleClick acquisition plans because there aren’t anymore DoubleClicks to buy, and putting together new spyware platforms and cookie ad networks will be as increasingly difficult to construct from scratch as building an alternative to YouTube.

Microsoft’s Last Ditch Effort to Grow.
By buying Yahoo, Microsoft hopes to cobble together something that can compete with Google in terms of size. Growth the way Google originally succeeded, by offering better search results or using a better business model, is no longer an option in a market that has matured.

The problem for Microsoft is that its best acquisition target just isn’t very good. Buying Yahoo to compete against Google would be a bit like Daimler-Benz buying Chrysler, or TimeWarner buying AOL, or Borland buying Ashton Tate. What’s the attraction to buying a troubled company in flaming free fall? There are certainly plenty of warning examples of why this has failed dramatically in the past.

In particular, Yahoo presents a number of serious challenges for a Microsoft takeover:

Any “synergy” between the two can already be realized through friendly partnerships. Yahoo and Microsoft have already signed deals on linking their proprietary instant messenger systems to compete against open chat protocols backed by Google. Both companies can already collaborate on jointly marketing ad space on their search properties, even if nobody is really visiting them. Forcing the two together isn’t going to result in something of greater value because anything they can productively do together they can do apart.

The two partners have massive product overlap that exceeds even that of the merged Adobe and Macromedia. These redundant properties and services can’t be effectively joined together because they’re all built on very different foundations. Yahoo Mail, IM, search, music, maps, blogs, video, and so on would all have to either go away and be replaced with the Microsoft version, or alternatively replace Microsoft’s current offerings. Combining Yahoo Mail and MSN Live/Direct/Xbox HotMail (or whatever the latest brand name for it is) is not “synergy” but rather a subtractive value destruction.

Yahoo doesn’t need to be involved with or purchased by Microsoft in order to go out of business and fire all its employees. And conversely, replacing Microsoft’s MSN with Yahoo services wouldn’t really do anything to expand the company’s audience nor suddenly make its online services profitable.

Microsoft and Yahoo share little culture and vision. Yahoo is struggling to be like Google and works to support various open source projects, including PHP, FreeBSD, YUI, Squid, and Linux. It serves as an alternative to Microsoft products in a variety of its businesses; for example, Yahoo recently acquired Zimbra, an open source alternative to Microsoft’s Exchange Server and Outlook client email software.

Microsoft loathes open source in general and Linux, PHP, Zimbra, and other Windows-eroding products in particular. Microsoft intends to promulgate its Silverlight, .Net, and other proprietary solutions on the web, none of which would ad value to Yahoo’s existing properties, and would instead tend to cause mass defections.

Brain Drain. Microsoft’s absorption of Yahoo would destroy huge amounts of synergy-resistant products and services. Who would benefit from this? Google. Microsoft’s purchase of Yahoo would either intentionally result in the dismissal of brilliant open source engineers who would likely take their knowledge directly to Google, or simply send out cultural ripples that would prompt employees to leave voluntarily.

Microsoft is already suffering a tremendous brain drain as Google hires away all the smart people. Even Google is worrying that it can’t find enough qualified people to hire. Should Microsoft pay incredible billions for Yahoo, bust it up, and send its talented brains to its greatest rival?

Fleeing Customers. In addition to lost employees, Microsoft would also likely trample to death Yahoo’s remaining products by innovating new Windows-centric ties, sending the very audience Microsoft is hoping to buy in other directions. Flickr users would likely be tempted to move to Google’s Picassa, Yahoo IM users to GoogleTalk, Yahoo Mail users to GMail, and anyone who still uses Yahoo search might likely defect to using Google as well.

Anyone who wants to use Microsoft’s search and online technologies likely already are because that’s the default choice for most users. The majority of Windows users are choosing to not use Windows search services and instead use Google, and no expansion of search services tied to Windows will change that, particularly if it comes directly from Yahoo, another site people are intentionally choosing not to use.

Fleeing Partners. In addition to an exodus of customers–many who aren’t even paying to use Yahoo’s services–a hostile takeover of Yahoo by Microsoft would also have a chilling effect on Yahoo’s current partnerships with open source projects and its increasing integrations with partners such as Apple. While Google and Apple have established themselves in tight partnerships, Apple has also gone out of its way to develop a relationship with Yahoo.

Why? While Apple and Google cooperate, they also compete in some areas, or simply work at cross purposes. Google directly supports FireFox while Apple maintains its own KHTML-based Safari browser (which also integrates with Google search); Apple offers its own fledgling .Mac services that compete to some extent with Google’s; Apple has its own smartphone strategy that stands distinct from Google’s Android. The two companies have independent ideas about the future of productivity software. These don’t make Apple and Google enemies, but they do create reasons for Apple to develop parallel partnerships with other companies in the search engine space.

Apple’s stock Widget in Mac OS X and the identical Stocks applet on the iPhone are both connected to Yahoo Finance rather than Google’s similar service. Search features on the iPhone can also be run through Yahoo as an option to Google, and the Weather applet is also based on Yahoo’s data. Apple also promoted Yahoo as its partner in offering push email on the iPhone.

While Apple also forms partnerships with Microsoft in promoting Office for Mac and in building interoperability with Microsoft’s proprietary OOXML file formats and its Active Directory and Exchange Server, Apple would likely be hesitant to build online partnerships with the company that expressly worked to destroy the Macintosh after having cloned it, pointedly tried to kill QuickTime and OpenGL and every open file format, openly dismissed the iPhone as an expensive joke, and has a long standing grudge against open, interoperable technologies of any kind. Other Yahoo partners have similar reasons to abandon the company were it to be acquired by Microsoft.

Microsoft’s Plot to Kill QuickTime
Apple: iPhone Now Costs Less than Ballmer’s Lame Motorola Q
Office Wars 3 – How Microsoft Got Its Office Monopoly

Microsoft’s Failing Monopoly Powers.
The search business is not in a massive adolescent growth phase. That ship sailed; Google earned its place at the top, and won’t be fiercely toppled by a merging of two very dissimilar runners up who both failed compete well individually against Google over the last decade. Adding Yahoo to Microsoft will actually serve to dismantle the existing competition to Google rather than binding the two also-rans together as a stronger rival.

Microsoft probably realizes this. Yahoo certainly does or it would have accepted Microsoft’s previous offers dating back over the last several years. The problem for Microsoft is that it has no other obvious alternatives to improve its showing in the online and search market. The power of the Windows monopoly has begun to dissolve, making the company unable to force itself into new markets with a threatening iron fist.

Particularly since 2000, Microsoft’s monopoly position has:

  • failed to advance Windows ahead of Apple’s Mac OS X in the consumer market.
  • failed to prevent widespread server adoption of Linux among Enterprise users.
  • failed to beat or even match the success of the iPod over years of exclusive licensing deals with hardware makers in Media2Go and PlaysForSure.
  • failed to successfully establish its various Windows Media strategies against Apple’s Quicktime and iTunes in digital downloads.
  • failed to establish Windows Smartphones against the Enterprise adoption of RIM’s Blackberry and the consumer adoption of the iPhone.
  • failed to push console sales against Sony and console profitability against Nintendo.
  • failed to stop the renewed growth of Firefox in the browser market, and prevent new competition from Safari and Opera, particularly in mobiles.

With Microsoft increasingly unable to expand or even maintain its monopoly powers, or successfully use them to force the adoption of its own products, what benefit would there be in buying up Yahoo and attempting to use it as an expanded version of the same online strategies that currently aren’t working?

CES: Fear and Loathing in Las Vegas
Video Game Consoles 2007: Wii, PS3 and the Death of Microsoft’s Xbox 360
The Unrealized Potential of Apple’s Hybrid Platform: Mac, iPod, iPhone, and TV
iPhone Grabs 27% of US Smartphone Market

Would Buying Yahoo Kill Microsoft?
In addition to just being an all around loser idea in general, a hostile takeover of Yahoo at $44.6 billion or more would take all the cash Microsoft currently has and then some. The company reported around $21 billion in cash and short term assets at the end of 2007.

Microsoft has been frittering away its cash stockpile by paying dividends to shareholders and buying back its own stock. Dividends and stock buyback are what a company does when it decides that its investors can do more with its money that the company can itself.

Microsoft has been betting against its own future, essentially giving away its cash position because it saw nothing it could effectively do with it. If it were able to turn that cash around to buy strategic products or companies to expand its position, or to invest in building out new growth of its own, it would hold on to its savings just as Apple has been.

Apple is dramatically expanding its campus, expanding its online services business, expanding its iPods into a WiFi mobile platform, expanding the iPhone into a worldwide smartphone development platform, expanding its Macintosh market into new directions, expanding its retail operations, and expanding its online media sales. It also wants to be ready to acquire the next application team or innovative company it has the opportunity to buy. Apple is therefore sitting on its cash, not giving it back to investors.

Microsoft is currently generating a lot of cash from its desktop, server, and office businesses. It wouldn’t have any trouble going deep in debt to buy Yahoo and then quickly repaying its loans from its rich income. However, what would that accomplish? The company would be burning up its cash pile and marking all of its future profits for the same flames, all to acquire a company that’s a bad match and which would almost certainly result in a huge employee, customer, and partnership defection. All that money burnt for the shell of Yahoo’s struggling operations.

It would take at least five years for Microsoft to merge Yahoo into its own holdings. Yahoo has only recently finished integrating Overture into its own operations, despite having purchased the company way back in 2003. While Yahoo and Overture were a sensible match with less overlap, a similar vision, and complementary products, that merger was fraught with crisis and problems and management politics. Is Microsoft going to gobble down Yahoo any faster without the same kind of heartburn?

Five years from now, Microsoft’s monopolies will likely be in far worse shape than they already are. Over the last half decade, Microsoft lost its desktop reputation to Mac OS X and saw its Enterprise role slip precariously as the rest of the industry has aligned behind Linux-oriented strategies. In concert with those changes, the credible threats to Office have emerged in the Enterprise with OpenOffice, now sold by IBM under the Lotus Symphony brand, and Apple’s iWork among consumers.

Microsoft doesn’t even have to lose many sales to rapidly feel the heat of increased competition; once its monopoly position begins to melt, there will be a massive rejiggering of where software profits flow and in what quantities.

Microsoft’s billions in revenue are based on its ability to sell Office licenses to consumers for $500 and license Exchange and Server products for $15,000 a pop to small workgroups. Competing against $79 consumer packages and IBM’s free productivity software tied to Lotus Notes and its Linux services, Microsoft simply won’t be able to extort that kind of cash anymore, even if it can continue to sell the majority of the software pie in terms of units. The company has already been forced to dramatically re-price Office for Mac and offer far more generous licensing terms, just because of the arrival of iWork.

That strongly suggests that in 2012, Microsoft will be bringing in much less revenue and slimmer profits, just as it would be finishing up its Yahoo online services merger and selling Windows Seven and Office 15 against free alternatives on the PC and better integrated products from Apple.

There’s also no reason for believing that a bigger MSN could effectively compete against Google’s offerings in the online space, or even that MSN would be bigger at all after suffering through a painful transition that involved mass defections of Yahoo’s former employees, customers, and partners.

Microsoft’s Outrageous Office Profits

Microsoft’s Outrageous Office Profits
Windows XP Media Center Edition vs Apple TV
Better Off Dead?
A cynic might suggest that such a brutal merger might provide just what the world needs: a dramatic reduction in Microsoft’s power and a disassembly of the largely ineffective Yahoo in order to better use the resources that it currently sits upon. At the same time however, such a consolidation threatens to put too much power in one place. While Google has complained that Microsoft’s Yahoo bid might result raise antitrust issues, the biggest problem created might be the elimination of any check to Google itself.

Without Yahoo, and with a desperately retooling MSN consumed by its own internal merging and reconstruction, Google would end up as the only credible choice in online search and advertising. It would enjoy something like five years of depressed competition, allowing it to either sit back and coast, or to spring forward and clean up the business, establishing itself as even more of an impossible to dent rival than it already is.

Google is already buying up ad networks and depressing the price of advertising, creating a notable pinch on ad supported content sites. Unchecked, Google could become the only way to advertise online, and the only effective way to buy advertising space.

All of these scenarios demand pause for thought, as Google’s current leadership position as the “Do No Evil” company with a reputation for resisting government oppression both in the US and in China could be relaxed once there’s no other game in town.

Given Google’s fairly stellar record in those areas, particularly when compared to Microsoft and Yahoo, it’s certainly too early to be castigating the company for imagined problems of the future. We do know however that a lack of competition makes companies fat and less responsive to the needs of their customers. Massive consolidations in the tech industry have chilling effects on competition and innovation.

What do you think? How would a Microsoft takeover of Yahoo change the position of Google and other tech companies, impact Open Source, the development of innovative new products, and competitive forces in online advertising?

I really like to hear from readers. Comment in the Forum or email me with your ideas.

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63 comments

1 bacon { 02.07.08 at 6:39 am }

I wonder if Microsoft truly has any intention of purchasing Yahoo. Maybe they are simply trying to scare Yahoo customers, partners, and prospects?

2 droughtquake { 02.07.08 at 6:50 am }

If, as some have suggested, Google invests in Yahoo to protect it from being acquired by MS, why couldn’t Apple do the same? Doesn’t Apple also have a vested interest in keeping Yahoo independent? Wouldn’t an investment by both Apple and Google cause fewer problems with regulators?

3 Jon T { 02.07.08 at 7:23 am }

I just loathe the way Microsoft always talks of “driving innovation”.

They don’t drive innovation, they are always dragged kicking and screaming into new things.

The only driving MS does is to drive the status quo and maintain the money machine.

4 John Muir { 02.07.08 at 7:41 am }

Speaking of which … I came across this Ballmer quote about Vista yesterday at Ars:

“We’re going to have to invest more than we ever have in consumer excitement.”

http://arstechnica.com/journals/microsoft.ars/2008/02/06/vista-marketing-chief-moving-on

I reckon it might well be just that kind of thinking – all problems can be solved with throwing money – which has brought about this acquisition. Daniel describes the conflicting ethos, undesirable overlap and structural incompatibility between MS and Y! just as well as I’ve heard it done. It seems like such a boneheaded move … until you compare it with what MS have been up to lately across the board.

Also, regarding Zimbra:

“Zimbra will be the first product taken out back to be shot in the head once the Microsoft takeover goes through.”

http://daringfireball.net/2008/02/yahoo_translation

I expect he’s right.

5 blacktalonz { 02.07.08 at 8:19 am }

Daniel this may be the best article that I have ever read, from any category or topic, or from any author.

Kudos. I know I have written some provocative comments in the past based upon my conservative beliefs, but I just wanted to say Thank you and Wow.

You have shown a remarkable grasp of the far reaching implications of this deal. I now find myself poised between hoping this deal goes through and thus destructing Microsoft even further, or hoping this deal does not go through forcing even more desperate gyrations from Microsoft in the net arena.

I have emailed this article to every one in my address book. This is the first time in my 15 years online (yes counting the BBS days) that I have promoted an article to all my contacts. This article is a bona-fide example of intelligent blogging as it’s meant to be.

In case I have not clearly stated my position, this article is a must read for every netizen on the planet!

6 João Gomes { 02.07.08 at 11:47 am }

I wholeheartedly agree with blacktalonz, this article is absolutely tongue-in-cheek… Congrats, Daniel! I’ve been not-so-secretly waiting to witness Microsoft’s demise ever since I switched to the Mac (and that was four years ago!), but I was never sure how that would pan out. Guess that you provided a lot of the answers! I’ve been reading your stuff for quite a while and always thought, alternatively, “I’ve had that figured out already and how come nobody mentioned it before?” and “I wouldn’t have seen that one coming”, but always ended up thinking “now that’s some smart writing there”.

With this article the latter happened, probably because by now, after having avidly read every single RDM article, I can look through Microsoft’s non-clothes even better. But, anyway, I must tell you I absolutely love the way you summed it up in the end; we have all commited the sin of anticipating the schadenfreude that Microsoft’s epic (or not) destruction will bring (I’m thinking of your hilarious photochopped banners :D ) and, yet, you’re the brave one throwing rocks straight at the beast’s face. ;)

Kudos and keep up the good work!

7 Les { 02.07.08 at 12:20 pm }

Great article Daniel! Wonder what fees MS paid the likes of McKinsey and Boston Consulting Group to provide strategic studies that show the market share gains and synergies that this take over will generate…

8 OlivierL { 02.07.08 at 12:28 pm }
9 purejadekid { 02.07.08 at 12:35 pm }

There is a small pie in the sky chance that MSFT may avoid the temptation to Windows-ize YHOO’s best technologies and instead, YHOO could turn Microserfs into Yahooligans, much the way Flickr management “Flickrized” Yahoo! or Pixar leadership reinvigorated a dead and rotting Disney Animation in a healthy “takeunder”.

Flickrization of Yahoo: http://money.cnn.com/magazines/business2/business2_archive/2005/12/01/8364623/

By resisting the urge to axe them in an optimistic, misguided attempt to migrate users from YHOO properties to MSFT in an attempt toe the party line (Windows! Windows! Windows!), can Ballmer and co. listen to new undermanagement and infuse some life and youth and perspective into an ailing technology?

I wish, I hope. I don’t think so.

Yahoo!’s culture and technology platforms (FreeBSD/FOSS) are so much better for the web, for consumers, for developers, for innovation, for the future, than MSFT + Windows, but “taking it out back and shooting it in the head” is the worst and most likely thing Microsoft’s current leadership will do to Yahoo! properties. I think mass migrations to Google alternatives are likely as Daniel points out.

That’s not a world I want to live in: a world where Yahoo!’s Open Source and Open Standards Web enthusiasm are silenced and replaced with Windows lock-in, leaving Google and Apple the only >$100B consumer tech companies to defend Open Standards on the Web. Google with less competition. Flickr rebranded with some name that changes quarterly (Windows Live Photo, Windows Dead Photo). Blech.

Can’t Microsoft understand? The days of leveraging Windows lock-in are over. I suppose they are forced to attempt to “compete” in every possible market because they have no room for growth after taking over 95% of the PC market… For Microsoft, like ancient Rome, uncooperative Visigoths with a vastly different culture (Yahoo!) are not likely to come quietly.

Despite their official blog position urging the SEC to consider this anticompetitive, Google has got to REALLY be thinking “Our two biggest competitors, attempting to merge disparate cultures/technologies? They’ll die trying. Bring it on.”

10 lehenbauer { 02.07.08 at 12:55 pm }

I get the problem. MS isn’t getting traction with the homegrown stuff. But Daniel’s analysis of the lack of fit is spot on.

I don’t think MS will be able to resist the impulse to burn down Yahoo and replace it with their own stuff, as Daniel documented in his piece on WebTV.

Google has to pretend to be concerned and it’s basic gamesmanship to try to make it cost more and take longer, but secretly I suspect they’re ecstatic because both MS and Yahoo will turn inward, develop an imbalanced spin and shed their brightest talents, while the managers spend years jockeying for power and position.

The deal is getting near universal derision, and I don’t think a couple years from now we’ll all be going “wow, we were wrong.” Fail.

11 qka { 02.07.08 at 1:16 pm }

I wasn’t aware of Yahoo’s position regarding significant Open Source technologies (Zimbra, et al.).

While that is not all Microsoft is after in their desire to acquire Yahoo, based on their history, I can’t help but suspect that MS has considered those into their acquisition, with the intent to kill them off.

12 gus2000 { 02.07.08 at 1:39 pm }

I agree that the Y!/MS merger will damage Microsoft and destroy Yahoo. I don’t believe, however, that this will leave Google alone in the search space. The people running AltaVista, Dogpile, Ask.Com, Lycos, etc., would certainly enjoy an opportunity to challenge the big dogs, and a Yahoo meltdown would provide the impetus.

As you pointed out, Google went from a drunken college-dorm idea to the #3 portal overall in 5 years. If the current competition softens, I would expect at least one of the lesser players to step up.

And while I agree that monopolies are bad for everyone involved, I can’t imagine that Google would ever reach the same level of monopolistic power that Microsoft wielded over the computer industry. There were huge barriers to entry for any Microsoft competitors, but a new search engine is just a URL away. And Google has no assured revenue steams from locked-in hardware vendors, which is how Microsoft was able to “sell” 100M copies of the universally-panned Vista.

So while I feel badly that the Yahoo era is coming to a close, and quietly rejoice that this will distract Microsoft from their quest for galactic domination, I’m not at all worried that this will turn Google into a monster.

13 addicted44 { 02.07.08 at 2:21 pm }

While I often disagree with the content of your articles, you are the only blogger who makes an actual effort to parse deep into the details of any matter. You show how blogging should be. Nice job.

Re: Zimbra, my university decided to switch to it before it was purchased by Yahoo. After the purchase, the decision makers figured it would only help, since Yahoo is a very good company in terms of open source. However, with this move by MS, there is serious talk of hiring our own guys who will help maintain the code. MS will probably kill Zimbra within Yahoo, but fortunately it will survive as an open source package, and people can rely on that.

Zimbra is a prime example of what Yahoo can achieve when it does the right things. I know that most of the infrastructure was setup pre-Yahoo, but the rapid improvements Y! has made since they purchased them is a prime example of what Yang promised. Unfortunately, as Gruber points out in his PR speak article, MS is taking great advantage of Y! being terribly underpriced by this spooked market to purchase Yahoo. I think MS would benefit tremendously if they were to let Yahoo continue operating independently the way it does now, without changing management, or operating structure, because its stock price will rise pretty soon. However, MS is too much of a stubborn monopolist to let that happen…

14 lightstab { 02.07.08 at 2:24 pm }

Great article, Dan. I’ve been praying every day that this deal goes through, cause mark my word, it will be the biggest mistake they’ve ever made. I like your point about the rebranding of Yahoo. The best thing for Microsoft would be if they just left Yahoo alone after the buy-out, because as you pointed out, if MSN is set up by default on most computers and people are still actively avoiding it, buying out Yahoo is not going to change that.

So, if Microsoft really wants the buyout to work, they need to leave Yahoo alone and maybe even incorporate some of stuff Yahoo does right into MSN. But it’s not in Microsoft’s nature to do such a thing. It’s like that scorpion and frog parable. You just know Microsoft is going to sting Yahoo in the back mid stream.

Maybe Microsoft just wants to kill Yahoo as competition. It wouldn’t be the first time they did that.

15 David Dennis { 02.07.08 at 2:28 pm }

I wrote a long essay in response to this that touches on questions such as antitrust, the prospect of future competition for Google and sentimental behaviour supporting Yahoo!.

I hope you’ll wonder by my blog and enjoy it.

16 jfatz { 02.07.08 at 2:34 pm }

Heck, screw “half decade,” over the past year Microsoft seems to have lost its desktop reputation… to Microsoft!

17 jfatz { 02.07.08 at 2:41 pm }

Out of curiosity, what did Microsoft change in the pricing of Office for Mac that would have any connection to iWork or anything else? From what I see, the prices for the various versions of Office offered on Apple’s website parallel the prices on Windows, so…

Are you talking about licensing and business/education prices?

18 OlsonBW { 02.07.08 at 3:11 pm }

“The web had quickly established that there was no real money in pay per view content, nor in web site subscriptions, nor fee-based services. Microsoft’s huge investments in online properties had only served to prevent competition to Windows, not to build any real value or result in any new revenue sources.”

That sums up everything about Microsoft’s business practices since the early 80s.

19 stefn { 02.07.08 at 3:16 pm }

Great poster!

20 AlanAudio { 02.07.08 at 3:29 pm }

There’s one aspect which seems infinitely more important than the others.

If this potential acquisition is all about becoming a credible rival to Google in the search market, then is is likely that two failures in the search market can be combined to make a success ? Common sense suggests otherwise.

21 danieleran { 02.07.08 at 3:41 pm }

@ jfatz:

Office for Mac was previously $150 for a student/teacher edition, $300 for a regular version, and $400 for +VPC.

With iWork at $79, Microsoft rebranded the $150 edu version as its entry level “student and home office” version and removed the restriction of it only being properly licensed if used by education users. That’s a $150 discount.

I thought this was only available on the Mac side, but it appears to also be replacing Works on the Windows side as well. Microsoft still gets businesses to buy standard or Pro licensing to use with Exchange, but those volume licenses are much cheaper than retail products, commonly $30-80/user depending on the app.

22 jfatz { 02.07.08 at 4:52 pm }

That’s what I mean, though. They did the same thing on the PC side, shifting and rebranding the old S&T edition as “Home and Student,” removing Outlook (which no one seemed to want), keeping the main three programs, making it $150 retail for a 3-seat, updatable license. And that was certainly before the new version of iWork or Office for OSX was out.

While that’s obviously showing some pinching in general, I don’t think it comes much from the OSX side of the equation, but rather just from their desire to sell more of Office. Windows has a whole suite of options, but at least has a low-enough entry position, and as you’ve certainly said before, Windows revenue comes from OEM licenses that are bundled with basically every new computer and are sold for FAR less than retail boxes. If the same equation is followed for Office, this makes it FAR more likely to see Office often bundled with a lot more machines.

As well, they’re competing not just with other free products like OpenOffice or low-cost ones like iWork, but also against all their old “good enough so why should I upgrade?” Office versions as well as the trivial ability to pirate it. A low-cost entry point for their most desired products (Word and Excel, and to a lesser-but-steadily-increasing-extend Power Point) is what they NEED to actually get people to upgrade from their old Office suites or say “ok, it’s low enough now that I might ACTUALLY buy a copy instead of messing about with hacking/WGA/etc.”

Small businesses don’t often need more than those three apps, but are also pretty likely to pick up a pirated copy, or install one old copy on every machine, so that’s good to pick up even THEIR business. Larger businesses, meanwhile, need more of the features, so they’re still screwed in having to pay for the larger $300-400 boxes, or site licensing, which I don’t think has dropped at all.

It seems MS is bowing to a LOT of different pressures for the home user, and realizing they can’t “get away with it” anymore even on the PC end, as they’ll end up losing even to their OLD sales!

And, of course, they want to not only get more revenue but also build up more support for their newer Office architecture, so I imagine they’ll even accept as “lower profit margin than normal” on bulk consumers to get it into more hands.

23 harrywolf { 02.07.08 at 6:53 pm }

Another excellent article, Dan!
Be careful, you may be accused of having a monopoly on high-quality writing on the web….!

@lehenbauer:
I like your notion of managerial in-fighting – it will surely be the mother of all office bloodbaths.

@lightstab:

The nature of Microsoft is a very good point – they have the instinct to destroy rather than create.
“Why did you sting me, now we’ll both die?”

It seems the consensus here is that it will all end in tears, and I agree.

The very nature of Microsoft and its monopoly carries the seeds of its own destruction within.
Its a natural law that all things must pass – the trick is to enjoy the good times while you can.

If you are a long-term M$ shareholder, you have presumably done very well, but the share price has been moribund for some time, so there is a natural desire to look elsewhere for fresh profit.

There has also been the King Lear type abdication by Gates, but he seems to pop up all over the place, still the King, undermining Ballmer.

So the big company does what it always does, (and Ballmer needs a ‘hail mary’ pass doesnt he?) it attacks with overwhelming forces of cash and shares.

But every time it wins territory, it has to convert the people of that territory or integrate them or sack them.

As its Empire grows, small empires spring up, and it becomes an unwieldy beast.

I would have said that an attack on Office was the only way to kill Microsoft, but I had discounted self-destructive forces within, as described by Dan and various commenters here.

Purchasing Yahoo will occupy a lot of M$ resources – at the very time when competition is growing to Office, to Windows and to mobile computing with the amazing iPhone.

I cant quite see the tectonic shift yet, but you never can see the big crash until it happens….

I apologise for the proliferation of mixed metaphors – I always get too excited at these big games!

24 John E { 02.07.08 at 8:21 pm }

MS purchase of Yahoo would be a classic Borg “assimilation.” all the independent features of Yahoo and its operations would be killed – on purpose, to prevent any advances that might undermine MS’s monopolies – and what was left submerged into the MS collective.

but it will fail badly. the Euro regulators are going to require spin-offs of important chunks of Yahoo. over half of Yahoo’s customers will go elsewhere rather than MS. and worst, nearly all of Yahoo’s talent will leave. ironically, that may seed a whole new generation of very creative web industry start-ups.

the one real potential alternative buyer that has not been heard from yet is AT&T. it uses Yahoo as the front end for its ISP services, is expanding Yahoo partner services right now for its U-Verse home media package, and is definitely a 1600 pound gorilla financially. No way it wants to get trapped in orbit around Miscrosoft instead. it’s planning a national wi-fi net – not just hot spots – of some kind and obviously could make very good use of Yahoo to jump start it. and the Euro regulators won’t have any real issues with AT&T.

so i give an AT&T rival offer a 50% chance to happen. it would be a stock swap, AT&T is not flush with cash. i bet Yahoo would take it right away. anything but the Borg.

25 Gatesbasher { 02.07.08 at 9:45 pm }

I’m conflicted about this! I live my life on Yahoo; I use Yahoo Instant Messenger to the exclusion of all the others; I belong to about 30 Yahoo Groups…BUT: This may be the bonehead move that finally does the monster in! As you can see, I’m a very confused man!

I used to think that Microsoft was so well-entrenched in the “enterprise” sector that nothing could dislodge them. But people said the same thing about IBM, remember? Then their monopoly evaporated overnight! Office is of course the 800-pound gorilla that every business thinks they have to have. The first chinks in this perception are beginning to appear; you’re hearing anguished bleating that everything has to be “absolutely 100% compatible” with Office or it can’t be used. As if Microsoft doesn’t make each version slightly incompatible with its predecessors to ensure that you upgrade!

I think this is just an excuse; what “enterprise” (as opposed to business) likes about Office is the excruciatingly unpleasant experience of using it. This is the real motivation for hanging onto it tooth and nail. In “enterprise” (those cubicle farms with acre after acre of Dell c***boxes on desk after miserable desk,) the primary rule is: If your life is not a living Hell, you’re not earning your pay.

I think as soon as “enterprise” realizes that Open Office, since it’s designed to ape MS Office so exactly, can deliver all the misery they need to inflict for free, Microsoft’s monopoly will also evaporate overnight. What will save them then? Yahoo? Does anyone imagine that they won’t run Yahoo into the ground? Will there be another concatenation of absolutely unbelievable historical accidents like the ones that put them in their present position? I doubt it. Another company like Seattle Computer Products is not going to write another DOS for them to buy, another IBM is not going to come along at that exact moment looking for just that, and hopefully another John Sculley won’t engineer another palace revolution at Apple and hand them the keys to the candy store. I think the miracle we’ve all been praying for could happen, and I think it could happen soon.

Of course, I’ll miss Yahoo….

26 UrbanBard { 02.07.08 at 11:51 pm }

A job well done, Daniel. That was the clearest examination of the Yahoo acquisition that I’ve seen. I applaud you.

Your article shows how desperate Microsoft must be to even consider the deal. And it brings up an interesting point that people, and companies, often unthinkingly continue to pursue practices which gained them success, long after the world has adjusted to them.

A diminishing returns have set in on practically any action that Microsoft can take. This is as true of Yahoo as well. Both companies need to reinvent themselves. Many people on the Wintel side will not see the handwriting on the wall and the Clue Train will bypass most of the PC Pundits. They will be left wondering what happened.

It took Apple over ten years to build a foundation on which it could adequately compete with Microsoft. That job is done. Yes, Mac OSX is imperfect but is miles better than Windows Vista.

Steve Jobs said after Leopard was released that he is planning on a 12 to 18 month upgrade cycle, so I expect Mac OSX to rapidly improve. In three to four upgrade cycles, Apple can leave 32 bit processing behind. Big things are coming which we can only glimpse at now.

Intel has been waiting for a partner like Apple to help it push the hardware envelope forward. The processor chip that Intel designed for the MacBook Air is indicative. Microsoft was always holding Intel back because it wouldn’t provide the software to run advanced designs like EPIC.

Apple is likely to pushing Intel to innovate in an attempt to produce chips which Microsoft cannot run Windows on. They will be faster, cooler and cheaper than anything else that Intel sells.

27 Ephilei { 02.08.08 at 12:24 am }

There’s still a big issue I’ve yet to see approached: If Microsoft has been trying to perform an inside deal for years and failed, why do they think they’ll succeed now? What’s the advantage of a public offer? For that mystery, I’m skeptical the deal will happen.

And as much as I’m a google fangirl, I’ll have serious monopoly fears from them if this does go thru. AOL’s fallen out, except for massive AIM accounts. Yahoo would disappear except for massive email accounts. MSN would disappear while trying to rebrand to Yahoo. What competition does that leave? Facebook? Zoho? Please. I do think Google is all good at heart, but companies change and power corrupts.

Maybe the enduring hope in all this is developers determine what software exists and they will always vote with their feet.

28 ijoyner { 02.08.08 at 12:27 am }

As I posted on news.com, what is Ballmer’s business model?

“I’m going to f—ing bury that guy, I have done it before, and I will do it again. I’m going to f—ing kill Google,” Ballmer said of Google and its CEO, Eric Schmidt.

That’s his business model (or lack thereof).

Mergers rarely work. I used to be a Burroughs guy working for Unisys where Burroughs bought out Sperry, but was killed by Sperry’s poisonous culture. The business model for that was to make Mike Blumenthal’s retirement fund fatter.

Don’t spread this around too loudly though, we don’t want Microsoft getting out of this disaster (even though it’s a shame for Yahoo).

29 jeffw { 02.08.08 at 1:36 am }

Daniel, I eagerly read your articles because they are nearly always well-researched and incisive. But this one is wrong on so many levels I wouldn’t know where to begin. I guess we could start with your not even mentioning that Yahoo remains solidly profitable, with no likelihood that it will not remain so, despite its slowing growth. It has problems, no doubt, but MS has never made a profit on its online business. You can’t be expected to know the ins and outs of the advertising business, but if you’re going to write an article that’s all about the advertising business….

Keep up the good work and great Mac and tech articles. I’m glad your readers enjoyed it, but the analysis misses the mark by a wide margin.

Oh, and don’t forget Google used to be the Yahoo search engine, just to fill out your history section. Yahoo search results went first to the surfer-driven results, then Google results. Later they bought Inktomi to bring the capability in-house.

And one last non-substantive comment. Yahoo isn’t trying to be like Google–Google adopted Yahoo’s culture in large measure, though ultimately they developed their unique spin on the .com, Silicon Valley zeitgeist.

30 Passionate iDreamer : 왜 마이크로소프트는 절실히 야후를 원할까? { 02.08.08 at 4:48 am }

[...] Why Does Microsoft Really Want Yahoo? [...]

31 Microsoft and Yahoo - Read Him, Not Me. | Merjis Internet Marketing Blog { 02.08.08 at 8:58 am }

[...] I’ve just been pointed to a masterful article about the proposed Microsoft acquisition of Yahoo. [...]

32 John Muir { 02.08.08 at 9:32 am }

Looks like Gruber is hedging his bets:
http://daringfireball.net/2008/02/devils_advocate

He uses the single example I can think of where MS aren’t classic MS: the MacBU. Even so, I can’t see the idea scaling all the way up to something the size and breadth of Yahoo. Indeed, judging by what comes out of them in bits and blogs, the MacBU come over as more of a standard MS department with a chiller full of Apple brand Kool Aid than as a true Mac outfit!

Now, if I suddenly could suddenly control Steve Ballmer (à la Being John Malkovich) and didn’t care to take the opportunity to run MS into the ground and get him sacked in the process, I honestly would go ahead with something as weird as Gruber and addicted64 have said. Microsoft’s ultimate choice is to carry on playing the universal bad guy as they are, or to change like the rest of the industry in the face of the internet. Option 1 is obviously the default but will lead them into the trashpile of history sooner or later. Option 2 is as big a change as Steve Jobs was to Apple in 1997. Is Ballmer really the right Steve for an epic like that?

In my opinion what makes this whole MS+Y! affair interesting is the questions it poses for Microsoft. A big deal like this could be the trigger for significant change there. Otherwise it could be the clear start of their downfall.

The one outcome I’m willing to rule out is MS±Y! being stronger in five and ten years from now while still based on NT and proprietary lock-in.

33 Galley { 02.08.08 at 10:13 am }

If this merger did go through, Microsoft should shut down MSN, Hotmail, and whatever crap they currently have and let Yahoo! be their online presence.

34 Perry { 02.08.08 at 10:38 am }

Yahoo and MS are very unlikely to merge in any effective way, and how could Ballmer not know it? Maybe Ballmer’s plan is to destroy Yahoo under pretense of merger and then seek anti-trust judgments against Google. If MS can’t rise to compete head-to-head with Google, then their best course may be to get a handicap placed on Google, see if they can get Google pulled down to MS’ level, and then compete. In Ballmer’s dreams.

35 jeffw { 02.08.08 at 1:35 pm }

Do you really think MS is spending 44 billion dollars to get rid of Yahoo? Come on, people. MS hasn’t been able to hit on a successful formula for online advertising revenue, and its lack of success there has left it vulnerable to the kinds of apps Google and others are pushing that threaten its Office hegemony. Yahoo, again acknowledging that it has stagnated in the past few years, has consistently generated solid profits and strong cash flow from its audience, which is the largest on the Internet and relatively stable. Microsoft calculates that the combined companies can leverage Microsoft’s operational strengths with Yahoo’s deeper understanding of the marketplace, retain the profitability and audience, and grow the business.

Microsoft knows we are only at the start of the online game, and Microsoft always plays for the long haul. Google’s revenue now is a drop in the bucket of what the industry will generate ten years from now. MS knows it doesn’t have to take share from Google, it just has to consistently capture more of the new business than Google to win. Much of that new business will come from search, but a lot will come from other areas; display ads (which Yahoo dominates), mobile (which Yahoo leads), media (up for grabs with all camps having irons in the fire), and if someone figures out how to make money, off social networks (where MS has a foothold and Yahoo has huge potential).

Yahoo represents a good bet to help them do that. Yes, there will be challenges. Someone cited the HP/Compaq merger as a disaster above. Read up, that’s no longer the consensus. It was bumpy and cost Fiorina her job, but the merger is now viewed as a success, with HP now drubbing the formerly unassailable Dell in the computer marketplace. MS no doubt figures that if HP can do it, they can figure it out as well, being far less hidebound than HP was at the time.

As for technology, I doubt that’s even much of a consideration in this deal. It isn’t about Windows, and it’s only indirectly about Office. It’s about the whole industry direction of where consumer computing is going, and MS needs to play to win. Besides, unless things have changed a lot, Yahoo has plenty of tech running on Windows. A harder and less likely change might be to move it from an Oracle shop to an MS SQL shop.

It’s pretty easy to see the reasons why MS might want this and why it could work. Nothing’s guaranteed, but there’s no reason to believe the combined companies would fail dramatically. Quite unlikely, actually, but there’s a better chance they remain behind the industry growth curve.

The harder case is why Yahoo would agree to it, for any reason other than that they have no options they can claim are equally attractive to shareholders. Yahoo doesn’t need the money, doesn’t really need Microsoft’s scale unless and until they can figure out how to do better with their existing assets and audience, and doesn’t need the engineering talent. They need a revamped, hungrier culture, focus, creativity, innovation, and an ability to respond rapidly to consumer trends. None of which Microsoft brings to the table. In fact, MS is worse at all of those things than they are.

Sometimes a shock to the system like this can bring renewed energy. MS has regularly re-cast its online efforts and would probably have no problem (and would be very smart to) run almost everything under the Yahoo! brand, regardless of which platform and what people they retain for each service. They could declare clear winners and losers, clean house on both sides, and unleash the winners to focus and kick butt. They could articulate a clear vision and go after it with all the money and resources MS brings to getting what it wants. Or they could royally screw it up. Who knows? But it will be interesting to watch.

36 mrunderhill { 02.08.08 at 1:36 pm }

If Microsoft do aquire Yahoo then they’d be better off leaving the Yahoo brand in place and just leech off the revenue.

Rebranding Yahoo to M$ would be their biggest mistake as the brand just isn’t cool. That’ll just leave 2 major engines and not 3.

In search it’s already over for Yahoo and MSN. Even in their hayday they couldn’t touch Google. I mean “Googling” is in the language now.

Google also know’s that it can’t sustain revenue from search alone and like all innovators (Apple inc) have plans in parallel. Dan points out the M$ failures since 2000 which pretty much tells you there is no plan.

M$ is just thrashing about in choppy waters desperately looking for something to grab on to and Yahoo might just be the sort of weight needing to sink it.

37 John Muir { 02.08.08 at 2:08 pm }

Something to bear in mind:

Out here in the rest of the world / Europe / Britain, MSN Messenger is already overwhelmingly dominant for IM; and very likely Hotmail is for webmail too. Yahoo, to my knowledge, has a much weaker presence in any field when outside of America.

I don’t touch either of them myself, but if anything MSN is well ahead of Yahoo in many markets … so is unlikely to be replaced wholesale. Maybe. Though to be honest, the way MS keep flailing around with their MSN branding leads me to conclude that division’s run by baboons already!

38 John Muir { 02.08.08 at 2:10 pm }

@ jeffw

I bet MS top brass are thinking pretty much exactly what you said. Unfortunately, it sounds like AOL/Time Warner to the rest of us…

39 danieleran { 02.08.08 at 3:58 pm }

@ Jeffw: while HP+Compaq might not have ended up destroying both companies completely, it did end up throwing away all sorts of “non-synergistic” technology and resulted in a company that together was less than HP and Compaq apart. Being #2 and/or tied for #1 in market share is not necessarily better than being #2 and #3.

HP+Compaq ended up throwing away HPUX/PA-RISC and Digital Unix+Alpha in favor of Itanium + NT, which didn’t work out so well at all. Now imagine Itanium on a software level, and you get Yahoo + MSN.

I directly noted that Yahoo is turning a slight profit. However, its profits are shrinking, its revenues aren’t growing by much, and in comparison to Google, it’s not looking too good at all.

I’m also not sure what you mean about Yahoo running on Windows. It certainly isn’t building a Windows Server architecture, and has been moving away from proprietary software as it has been won over to the FOSS side by Flickr and other projects after having acquired them.

Yahoo did not set an open source pattern for Google to follow, but has rather followed Google’s Summer of Code and similar events by sponsoring some of the same kinds of things and seen success in doing so.

@John Muir:

MSN is strong in Europe with IM, email, etc. Yahoo is strong in Japan and other parts of Asia (which is why the company was involved in handing over Chinese dissidents). So Microsoft does have some worldwide reasons to lust for Yahoo.

Despite MS’ ability to buy Yahoo, and Yahoo’s current inability to easily reject MS’ huge offer, the US and EU would likely weigh in on the merger and at least require certain Yahoo properties to be divested for competitive reasons.

40 jeffw { 02.08.08 at 6:00 pm }

Without doing too much detailed research, it looks like Compaq and HP’s combined market share in PC’s was about 19% when the merger was proposed, vs. Dell being around 32%. Now HP is just above 19% and Dell is #2 at 14.6% of a larger market. The two companies’ combined revenue was about $87 billion and now it’s $104 billion. The two companies’ combined market cap at the time was less than $50 billion, now it is $108 billion.

Perhaps more important than the raw numbers is the fact that HP successfully transitioned to a company able to drive volume products in multiple market segments; enterprise & consumer, premium & value, etc. Yes, they jettisoned a lot of technology. That’s usually a good thing when it results in focus, higher margins, and growth. You say the company was “less” together, but most business analysts would say it is more.

Anyway, it remains to be seen what Yahoo/MS would be, and no doubt a lot would get jettisoned, and yes, there would likely be missteps along the way. But there is a solid business case to be made for it as well.

On the Windows point, I don’t know what the architecture is now, but 5 years ago, all the databases were Oracle on NT. Regardless, I wouldn’t underestimate the technology challenges, but it obviously wasn’t enough to dissuade Microsoft, and it’s probably not enough to derail a successful integration.

On the culture point, I grant you that (as I said) Google has led in many respects lately, as they have grown. The child does inevitably surpass the parent in many ways. But the acorn does not fall far from the tree, either.

41 Arnold Ziffel { 02.08.08 at 6:59 pm }

Microsoft’s motto is:

“Innovation Through Assimilation”™

42 John Muir { 02.08.08 at 8:28 pm }
43 smartphonedownloads » Blog Archive » Why Does Microsoft Really Want Yahoo? { 02.08.08 at 10:12 pm }

[...] (more…) [...]

44 Skid { 02.09.08 at 5:40 am }

Great article. At first glance I thought it was too long for my short attention span but then I started reading and couldn’t stop.

This is first class journalism.

45 Ubiratan { 02.09.08 at 3:04 pm }

Daniel,

You wrote:

“In 2007, Google continued to grow. In the winter quarter, it reported having boosted its earnings by 50% year over year and its earnings by 17%.”

I believe the second “earnings” actually means “profits”.

46 Bottacco { 02.10.08 at 8:00 am }

I read that many of you would like the demise of MS, even if that means Yahoo! going down with it. You better watch out or your desires may come true.

I have been a Mac user for more than 15 years and have seen many of these battles. Do you remember when IBM was the devil? And then it turned out that MS was much worse. Now we are talking about MS, but as Dan has pointed out, we better watch out or Google may become the next “bad guy in the movie”.

I don’t want MS to go away, but I want that it doesn’t have that much power. I am a Mac consultant and I make my living because of Apple products and technologies, but don’t be fooled, if Apple were in MS monopoly position it would probably be the same scenario… or even worse.

We Mac users, tend to think about the good all days in the garage, that being an Apple user is a way of life, that we form a great big family… but as the market share grows and years go by some of that is lost. Apple is a Nasdaq company and at some point they care about dollars and numbers… and to some degree it has to be that way. The problem is where to lay the balance point.

I want a market where several players sell their solutions and all those are interoperable. I know, it may be just an utopia… but dreaming is free ;)

By the way, as many have said, great article Dan.

47 Ubiratan { 02.10.08 at 10:44 am }

You can find this post translated to Brazilian Portuguese at
http://www.yawara.br.com/files/84ebc32bef27f8dde72c8d943e7555a9-14.php

48 gattsuru { 02.10.08 at 2:06 pm }

I think you’re making some pretty broad assumptions here.

Microsoft’s going to purchase a company with massive brand loyalty, expert technical people, great if specialized infrastructure, and some great software purchases… and promptly rebrand the company, force the technical people to learn entirely new architectures, toss out the infrastructure, and cannibalize the software?

Ballmer’s an idiot, but he’s not that stupid.

49 John Muir { 02.10.08 at 3:27 pm }

@ Bottacco

I’ve heard that argument a lot of times: all corporations are driven by profit alone, and therefore all of them are essentially amoral and self serving. It’s a view most often espoused by those just about to defend Microsoft … I wonder why that would be?

What makes Apple different to that idea is Steve Jobs and its culture of design. If Apple were about profits alone, OS X would be shrinkwrapped alongside Vista by now … at least to test the market if not as a riotous success. (I happen to think it would be a disaster for Apple, as Windows has never been about “good”, just ubiquity.)

But then again, if Apple or Google or any other firm whose products I use and who I respect were to turn evil all of a sudden: it wouldn’t matter.

Why? Because the last thing you wrote – an interoperable utopia – is hardly a pipedream. It’s the inevitable direction we are headed, and Microsoft’s woes are absolutely bound to it.

Where there’s a will, there’s a way. And where there’s demand for a Google and an Apple, there will be others who would succeed them if they fail. As for the role of bad guy, I really don’t think there is a self-sustaining requirement for that. MS can approach their ultimate culture and identity change whichever way they like. Just rest assured they will be the means of their own bankruptcy if they insist on going down in fire.

50 Gatesbasher { 02.10.08 at 6:07 pm }

@ gattsuru:

You wrote:

“Microsoft’s going to purchase a company with massive brand loyalty, expert technical people, great if specialized infrastructure, and some great software purchases… and promptly rebrand the company, force the technical people to learn entirely new architectures, toss out the infrastructure, and cannibalize the software?

Ballmer’s an idiot, but he’s not that stupid.”

Oh, but he is, and they are. This is exactly how they’ve always operated. I sincerely doubt if they’re magically going to turn into a completely different company just now, with the acquisition of Yahoo.

and @ John Muir:

You’re right: the interoperable utopia is already here, with Boot Camp and Parallels and Fusion, and Apple has delivered it. Microsoft will resist with every fiber of their being, and I think that’s what, more than anything else, will confine them to the dustbin of history.

Personally, I won’t be using this capability until Wine is ready for prime time, but for everybody who thinks they “have to” run Windows: Why in the world would you buy a computer that can only run one operating system? More and more people are coming to ask themselves the same question. It’s only a matter of time now!

51 John Muir { 02.10.08 at 7:33 pm }

Just a thought … in buying Yahoo: MS would be picking up those Google shares Yahoo were exchanged for Overture licensing, not to mention a patent salvo if that’s the kind of game they have in mind.

Still a hell of a lot of money whatever way you look at it though.

52 About Yahoo! And Microsoft | Pomme::TAB { 02.11.08 at 5:35 pm }

[...] Roughly Drafted has an article about Microsoft’s intention and why everyone is going to loose if the bid goes through. The [...]

53 L { 02.11.08 at 9:37 pm }

Who’s the girl in the leading story graphic? Makes me think of the 80′s.

54 Robb { 02.13.08 at 3:56 pm }

Well done article, Dan. I just don’t see how MS can pull a profit from this venture and then to have to borrow money to make the sale… that’s ripe for disaster.

@L
That would be Mary Elizabeth Mastrantonio, who was in a bunch of late 80s/early 90s movies.

55 surfish { 02.26.08 at 9:52 pm }

Eric Savitz must be stopped. He is polluting the marketplace regarding Apple. Go to Barrons and let him know about it in no uncertain terms. It’s your investment, protect it.

56 suz5987 { 03.08.08 at 12:31 am }

Hi everyone!
I’m doing a project on the Yahoo-Microsoft merger and have a few questions for somebody who has been following and understands this potential merge. If you’re willing to help, please let me know!
Thank you!

57 razorsedge { 03.23.08 at 7:06 pm }

really, this article is outstanding.

58 Microsoft’s Zune, Vista, and Windows Mobile 7 Strategy vs the iPhone — RoughlyDrafted Magazine { 08.12.08 at 12:28 am }

[...] Office Wars 3 – How Microsoft Got Its Office Monopoly Office Wars 4 – Microsoft’s Assault on Lotus and IBM Why Does Microsoft Really Want Yahoo? [...]

59 roper117 { 12.31.08 at 4:01 pm }

I love this article and it is true – the merger seems a bad move for Redmond but Yahoo, unlike Google has not shrugged off completely its use of Microsoft technologies and though more tied to Open solutions it would not be a completely foreign environment for Microsoft.

The fact is the Buyout of Yahoo terrifies the heck out of all MS haters (myself included) who use Microsoft only but for a lack of alternatives. The bottom line is that Microsoft is a paranoid dictator who feels the walls closing in at the height of power. Microsoft, like oil production, has peeked. OS adoption is slow. Competitors are making in roads and consumers are finding alternatives. Zune is awful, Apple wins, MSN/Live Search is stiff and proprietary – My ASP sites always outrank my PHP sites on Live search, and Apple is not just for academics anymore. Ubuntu and other Linux distros are widely adopted for servers and Google has joined the browser war with Chrome. Microsoft underlying fear is dying from a thousand paper cuts but more so, much more so the cancer (in their mind) that will kill them is looming ominously but quietly in the halls of Google. Google’s search engine dominance is almost as monopolistic as Microsoft’s hold on desktop Oss but like Microsoft before them Google isn’t reinventing the wheel, they are following proven examples. Google is adopting more and more open technologies that are more stable, less proprietary and CHEAPER to adopt. Vista requires a hardware upgrade for adoption in a business centers. Linux distros are fast becoming user-friendly and every day support more and more web apps.

Google is planning an OS. Google is the only name big enough for widespread adoption, Google is already in OS business on its own, Google tweaks Linux distros for its own server purposes and who the heck wouldn’t buy a Dell or HP (or Acer or Lenovo)”Powered by Google” with ton’s of web apps. Dell has given in to Microsoft and backed off its Linux units but in the face of a major onslaught of competition, PC manufacturers just might stop being bullied. Linux is more stable and that can be proven in crash testing. Google is spending (millions of) their own dollars to make WINE handle the most popular apps like Photoshop, Dreamweaver, and Quickbooks. Google OS is coming. I don’t know what it will be called but it will be here soon. At it’s core will be something like Ubuntu Linux and Microsoft knows it. They know they have a brand problem and if they can release a web application enabled OS with Yahoo (powered by Microsoft in small print) they can compete. Hell they may even switch to Linux Kernel core eventually as well (but I doubt it). The Yahoo bid is designed for one reason and one reason, it is a stop gap against loosing their core monopoly- the Desktop OS market.

60 Microsoft Bing share vs Google smaller than Safari vs IE — RoughlyDrafted Magazine { 07.16.09 at 12:21 am }

[...] Why Does Microsoft Really Want Yahoo? [...]

61 The Palm Pre/iPhone Multitasking Myth — RoughlyDrafted Magazine { 07.28.09 at 9:14 pm }

[...] Windows XP Media Center Edition vs Apple TV (Web TV) Why Does Microsoft Really Want Yahoo? [...]

62 How Microsoft Got Bing, And Why It Is Failing to Matter — RoughlyDrafted Magazine { 09.01.09 at 1:11 am }

[...] Why Does Microsoft Really Want Yahoo? Five Factors Shifting the Future of Malware and Platform Security [...]

63 How Oracle might kill Google’s Android and software patents all at once — RoughlyDrafted Magazine { 08.14.10 at 3:16 pm }

[...] Why Does Microsoft Really Want Yahoo? Anyone who thinks Google looks before it leaps has forgotten that Google only ever leaps, buying up regular new companies on a schedule rather than with a strategy, and blowing out one failed project after another (Answers, Base, Buzz, Catalogs, Dodgeball, Jaiku, Knol, Lively, Notebook, Orkut, Sidewiki, the Nexus One, Google Video, Wave, ad naseum). Google acts like a white trash family who won the world’s largest lottery, which is why it behaves just like Microsoft. Some companies actually early their revenues in a competitive marketplace, and have for generations of technology, like say, Apple. [...]

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