Much has already been written about the Microsoft's acquisition proposal for Yahoo, so I will not bore you by repeating the financial terms, posting Steve Balmer's letter to the Yahoo Board or speculating on the private equity firms considering to bid against Microsoft.
I do not think that the deal makes sense strategically for Microsoft. Despite the fact that the acquisition would be a significant departure from Microsoft's organic growth strategy, which is always a loud warning bell (see this post), I have other concerns:
- The Internet Issue
- Strategic Complexity
- Advertising is like Expedia
The Internet
Do you ever wonder why you dislike your phone company. The answer is that almost all these companies evolved from monopolies where there was little concern for either product innovation or customer service and great attention was paid to legal issues and regulators. Because of its dominant position in operating systems, Microsoft behaves in a similar way with limited product innovation, minimal concern for customer service and first class legal talent. (Yes--Microsoft has some of the best programming minds in the world, but what they produce rarely delivers a great product experience for the consumer or the enterprise (although a lot of people like .net, their server software and their "geeky" stuff.)
Now we turn to the turnaround of Yahoo--great lawyers and great programmers from Microsoft will not be the key. Synergies between the two companies in online advertising will not be a panacea. Yahoo's problem is that they offer no compelling proposition to the customer. Almost nothing that Yahoo offers is a market leader, almost everything they innovate is quickly surpassed by a competitor (not always Google) and they no longer understand their target customer (if they even know who that is). What Yahoo needs is leadership that understands the current Internet and the customers that "live" there. At an accelerating pace, the Internet is becoming the infrastructure for our social, intellectual and professional lives. Yahoo missed the change from portal visitors to people who "live" on the Internet. Microsoft almost missed the Internet (until Windows Explorer) and still has not made much of an inroad in the current Internet of Web 2.0. When it comes to the Internet, one company is almost blind and the other can only see with one eye.
Strategic Complexity
Microsoft faces a major strategic issue. Given the growth and popularity of web-based applications and SAAS (software as a service), how do they position Windows Office. Office is a major revenue and profit generator, but the market (both consumer and enterprise) is moving away from desktop applications. Yahoo, on the other hand desperately needs a web-based service similar to Google Docs in order to offer a more complete service package to this new user that lives on the Internet. With the acquisition of Yahoo, Microsoft not only has to consider how to address their own strategic dilemma but now they must also consider how the decisions may affect their $40+ billion acquisition. Or conversely, any success Yahoo may have with an online Office-like offering comes at Microsoft's expense. As a friend of mine used to say, "there is no technology that has yet been invented that can measure the complexity of these kinds of decisions".
Advertising is Like Expedia
Microsoft launched one of the first travel sites-Expedia-and subsequently sold it off. They sold it because travel sites require the ability to package travel offerings and this was not part of the Microsoft skill set. Programming, Microsoft's strongest competency, was not critical to succeeding in the travel business. Roll forward to today and we see Microsoft proposing to acquire Yahoo to improve its position in online advertising distribution. Programming is becoming less and less important to the success of online advertising. With the proliferation of Web 2.0 offerings, attracting the customer is becoming more important than the underlying programming. Good programming is necessary, but customer acquisition (and the related traffic) is becoming the critical skill. Since the days when Microsoft established its near monopoly in operating systems for PCs, the company has shown little expertise in acquiring consumer customers in market leading numbers (with the possible exception of Office and that may be debatable).
To clarify, I am not a Microsoft basher. I think their ability to establish a monopoly in PC operating systems will probably go down as one of the greatest accomplishments in business history. I just think that the acquisition of Yahoo does not make strategic sense. It is also very disturbing that Microsoft is so significantly moving away from a strategy of organic growth. I don't know which issue bothers me more, but I know that great companies grow organically.
Now, who should buy Yahoo? Very tough question, if you eliminate Google for anti-trust reasons (and I am sure that Microsoft's crack legal team would do all the staff work to show why such a merger is anti-competitive). Let's look at who has the leadership to turnaround Yahoo. Who understands this new Internet consumer who lives on the Internet? Who in the Internet space has the record to warrant a $40 billion investment? Very few candidates come to mind.
Jeff Bezos and Amazon might be a candidate. Amazon stock has basically tripled since 2002, the Kindle reader looks like a great success and their web service infrastructure business is roaring (broadband traffic for the infrastructure business exceeded the traffic for Amazon's website in 4th quarter 2006). Now if a private equity firm were to approach Amazon for a "joint" bid for Yahoo that would be interesting. Only problem is I think Bezos is too smart to divert from his own organic growth strategy.
What I think is more likely is that Yahoo will merge with a Web 2.0 company that is valued at over $10 billion dollars as a defensive move to thwart Microsoft (which may not work given Microsoft's market cap of about $280 billion) or the pressure from potential shareholder lawsuits will force the Board of Yahoo to do the Microsoft deal.
Wonder what Rupert Murdoch is doing this weekend?