Friday, July 20, 2007

Pouring Cold Water on the Microsoft-Buys-Yahoo Meme

Bloomberg News covers Stanford Group analyst Clayton Moran's claims that the seeming listlessness of Yahoo's management since Terry Semel's departure and sinking share prices are laying the groundwork for an inevitable and likely sale of Yahoo. Moran cites Microsoft as the likely bidder and beneficiary of online synergies that would boost both properties into a newly competitive position against rival Google. There are a lot of things that still argue for this combination - invigorated search technology and online office components from Microsoft, advertising know-how and effective destination content development from Yahoo - and a such sale is certainly not improbable. Yet I can't help thinking that this may be one of those "perfect" marriages that would go south far more quickly than people may imagine.

The main rub that I see is that both companies suffer from two similar maladies: weakening market mindshare for their brands and dysfunctional product development cultures. Microsoft has had a remarkable string of product introductions that have been flops, duds or near-misses, in spite of having a near lock on many key technologies. Its Internet Explorer browser, once the unchallenged ruler of online Web content consumption, now boasts only about 70 percent of the European marketplace, a problem only exacerbated by mobile content markets moving further away from Microsoft technologies. Yahoo has many comparatively healthy and innovative initiatives, but some of its most innovative properties such as Flickr, del.icio.us and Yahoo! Pipes are either standalone brands or initiatives that are relatively orphaned from the mainstream Yahoo offerings. The Semel legacy of traditional media development stalled the effective development and integration of social media, a strategic error that Yahoo is working hard to correct but nevertheless a legacy of poor market timing that Microsoft will do little to bolster.

Moreover a Yahoo acquisition will do little to help Microsoft penetrate the enterprise/prosumer space very effectively. Yahoo's withdrawal from enterprise services a few years back left the playing field open for Google, which is still at the foothills of enterprise content but building a steadily growing array of products and integration resources to build that base over time. On the consumer side the addition of Microsoft properties to Yahoo's ad base would be a strong plus, but not one that could not be offered by other parters as well with greater online growth potential.

Which brings us to the question: who would want to buy Yahoo? I think that it's far more likely that News Corp will see a Yahoo acquistion as a perfect complement to its holdings.Its online management team is both upbeat and highly experienced with social media via Fox Interactive Media's MySpace platform and would offer Yahoo a better chance to develop as a dominant media brand with a strengthened advertising base. Yahoo's strong online finance portal would complement potential content fed in from Dow Jones holdings should that deal close, a deal that would have already provided News Corp with good enterprise revenues and technology platforms. Yahoo entertainment offerings would complement MySpace nicely and its enormous base of user accounts would offer MySpace a shot in the arm as Facebook builds a stronger market share.

The only real question for a Yahoo sale is timing - and it's likely that Yahoo's nascent social media replacement for its less-than-booming 360 portal may be the timing telltale. If the introduction of this effort is not stunning or if management becomes discouraged in its early testing phases then it's highly likely that a deal will be executed fairly quickly one way or another. But don't be surprised if quiet talks are already in the works - no doubt awaiting News Corp's finalization of Dow Jones details before focusing on Yahoo. Other potential suitors such as TimeWarner could enter the picture (AOL round two? Probably not.) but few offer clear synergies. We'll see whether Microsoft has the gumption to pull the string on a Yahoo deal, but my guess is that they have their hands full with many core competitiveness issues already - and that News Corp will be able to define more profitable synergies and longer-term brand strength before Microsoft gets to pop the question.
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