Why Microsoft + Yahoo! makes sense – and why it won’t work

by Charlene Li

The New York Post and WSJ.com just came out with stories of a rumored merger between Yahoo! and Microsoft. On paper, the deal makes sense for the following reasons, but in the end it's going to be so hard that I don't think it will happen.

First, let's take a look at why it makes sense:

- Audience combination. Yahoo! and Microsoft have two of the largest online audiences – according to Nielsen//NetRatings, 107.8 million and 95.4 million respectively in the US in March 2007 (Update: note that these are BRAND level unique users for Yahoo! and MSN/Windows Live). Google had slightly more uniques than Yahoo! (108.4 million), but the combined unduplicated audience for Yahoo! + Microsoft is 129 million.

- Advertising powerhouse. While Google leads in search marketing, Yahoo! and Microsoft dominate display advertising. Google’s recent acquisition of Doubleclick (which Microsoft was bidding for as well) puts extra emphasis on the need to shore up their dominance in this space. Microsoft’s upcoming Strategic Account Summit next week should be particularly noteworthy given the rumors.

- Technology strengths. Microsoft is a powerhouse when it comes to engineering talent, between Microsoft Labs, worldwide investment in technology research centers, and fingers in all aspects of information technology ranging from enterprise search to mobile. Yahoo! is no slouch either, with particular strengths in display advertising management (specifically behavioral targeting) and search, but in this area, Microsoft is providing the bulk of the value.

- Media and Web 2.0 smarts. This is where Yahoo! really shines – its acquisitions of Flickr and del.icio.us and emphasis on social search and media position it well for new challenges. Yahoo!’s executives – with their strong media roots – truly understand what it means to build and maintain and audience.

So on the surface, it looks like it would be a good idea. Fueling the merger fire is the strategic need that the companies have for a combined company. After all, why would Microsoft want to ante up $38 billion for Yahoo!? For one reason (and it isn’t simply Google). It’s Windows, or rather, the declining importance of the operating system as it gets relegated to the background. I personally (almost) seamlessly switch between a Windows machine at work and an Apple at home, using a Firefox browser and online email. Microsoft has the technology to do parts of this, but not all of it. To survive going forward, Microsoft needs to have a robust online strategy and Live.com/MSN just doesn’t cut it.

Yahoo! comes to the table needing something too, but with less urgency. While it’s struggled with the launch of its new Panama search engine, it’s in a much better position to compete in this new world because of its focus on media and content. Its biggest weakness is that the fight is also on the Web services/API front, where the technology smarts that Microsoft bring would be a benefit.

But instead of debating the merits of whether this makes sense or doesn’t, I’d like to paint a picture of what the future would have to look for a merger to make sense – and why I don’t think this future will come to pass.

- Separate Yahoo/Live.com/MSN brands get merged into one brand. To fully realize the value of the merger, I believe there needs to be true audience consolidation under one brand. This will be tough to do as there are huge overlaps in the audience, and it would be tough to give up on all of that extra traffic and page views. In some markets – in Europe in particular – the MSN brand trumps Yahoo!, and in others, Yahoo! is much stronger while in the US, the brands are equally strong. So why consolidate at all? Because maintaining separate destinations for essentially the same audience and purpose diverts valuable resources that could be used to create a unique, powerful experience that can compete and win.

But there is one major reason why I don’t think Microsoft executives have the stomach for any sort of brand rationalization -- the continued dual branding of Windows Live and MSN. Each time I have a conversation with Microsoft about Windows Live, I get a different explanation of what it is and how it fits with MSN. If the company can’t event figure out its branding strategy with existing properties, I don’t hold out much faith that they could do so with a premium brand like Yahoo!

- A new company emerges with new leadership. Note that this would be a merger, not an acquisition. This means that Microsoft and Yahoo! will each have to come to the table ready to forge a new company from the assets of the individual ones. Egos and innate disdain from being competitors over the past decade would have to be set aside. Geographic distances (Seattle to Sunnyvale) would have to be bridged. And most importantly, a new company ethos, leadership, and culture, would have to be created. Neither company has ever been through a merger, or even an acquisition of this size and scope. And all of this done in the context of one of the most dynamic, innovative areas of business and in the shadow of a fierce competitor, Google. Even in the best of times, successful mergers are hard to pull off and I’m not hopeful that executive time spent on company politics will be minimal.

- The new company dominates over Google. Given the problems of a merger, the key measure of success in three years time is whether they will have made any progress in fending off – and catching up to – Google. After all, that’s the main impetus behind the merger, that together they would be better able to compete against Google. But given the distraction of the merger, and also, given that Google won’t be so encumbered, I think it would be unlikely that a combined Microsoft/Yahoo! entity would be able to do anything against the powerhouse. In the very long term (3 years+), there’s a chance that a revitalized company would be in a better position to compete, but this assumes that Google stands still for them to catch up.

Given the messiness of a full out merger – and also the limited benefit it would bring to Yahoo! – I believe that a merger won’t be in the works anytime soon. More logical would be partnership agreements where the strengths of each company are shared. These tentative first steps to a merger would make a lot more sense, giving both companies the ability to “test the waters” before jumping into the deep end.

But if I’m wrong and a merger does get announced, I wish the two companies good luck – they are going to need a lot of it to pull it off.

So what do you think – is a merger a good idea or a disaster in the making?

Tags: Microsoft, Yahoo, merger, charleneli , Forrester Research, Groundswell

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Comments

[Michael Urlocker]

Merger activity is often a sign of market disruption... when managers can't deliver the kind of growth that the CEO or the public markets expect, mergers look like a good idea.

We've seen this in newspapers...telecom... and now software.

Here's a video on some of the warning signs of disruption (8:56min)

http://www.ondisruption.com/my_weblog/2007/05/video_capitaliz.html

Mike
www.OnDisruption.com

[LivePaola]

Charlene, thanks for a thoughtful post that addresses the big questions and goes deeper than the knee-jerk comments we're reading right now.

[Victor Cook]

Microsoft Reboot!

In the history of financial markets has it ever really helped for two companies suffering from the same symptoms to join forces? Before you decide on an answer to this question, check out my analysis at http://www.customersandcapital.com/

[seoprousa]

I agree that with the merger the true volume of subscribers would appear to be closer to a Google sized subscription base but I also agree that the Problems seem almost to complex to help either Microsoft or Yahoo in their quest to advance on Google.
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[KwangErn Liew]

Have they consider some sort of an intrinsic partnership? Should work when both have the same goal, but different cultures.

[eunice]

Excellent points Charlene. To make a simplified historical comparison, look at the catastrophes of the AOL/Time Warner merger.

[Rusty]

I agree that a full merger is unlikely. A partnership seems more possible - and perhaps on the ad-serving side of the business rather than the social media side.

Some more thoughts on this topic are at:
http://www.digitalmarketing.us/blog/index.php/?p=6

[Gordon R. Vaughan]

Yes, there's quite a strong complementary basis for a tie-up, though as I guess they've concluded, also some daunting incompatibilities.

I've used MSN/Live Spaces for one of my blogs, and it's frustrating how confused their Live strategy has been, not to mention their declining support of the Mac.

Microsoft has had the sandbox nearly all to themselves for so long that I think it will take a major cultural shift for them to be able to do a deal like this, as I discussed recently on my blog All Things:

http://allthings.blogsome.com/2007/05/04/yahoo-microsoft/

Maybe in the short run, the best strategy for Microsoft would be to try to rationalize externally their internet offerings with a strong partner (Yahoo or someone else), through a newly-formed venture that gradually sucked in internet assets and technologies from both companies, as it proved itself.

The mere formation of such a venture by two heavyweights might well slow down Google somewhat, while with an actual merger, every hiccup could make Google even stronger.

[James Boyer]

Merge MSN and Yahoo. I don't think it is a good idea, They are both being bested by google for the same reason. They don't understand, it is about the user, make things better for the user, when I search I want the most relevant results. Yahoo and MSN just don't usually give me that. They need to do what HP did a few years back when they hired a bunch of Dells talented leadership. Get some of the top leadership from google and pay them what it takes to jump ship, good leadership is worth it.

James Boyer
Keller Williams Realty
Summit New Jersey

[mike]

Mr,charleni li, i think you the right and you have best ideas and openion about yahoo and MS.

[LOUIS TAKACS]

Is yahoo and their ceos really strong enough with the rest of the computer or whatever and intelligence world,FOR MICROSOFT TO GET AHEAD IN THE WORLD,(S).

[Ardith K. Tolson]

A Bit Upset!!!

First of all, those of us who really LOVE Yahoo aren't much into AOL / MSN.

I think YAHOO has done a great job at coming in as an unknown and making it a legit business WITHOUT MICROSOFT.

It would be a shame for Yahoo to give up it's unique edge for a CLONE OF MICROSOFT.

The Trillion $$$ company has already monopolized the computer market, charging consumers three times what the software is worth and AOL does more SPAM MAIL than anything I've ever seen on YAHOO. Including pornography, etc.

I'm not impressed with Microsoft in the least and I think Yahoo should reject the offer. Obviously Microsoft is intimidated by their success and want nothing more than to liquidate it and make consumers NEED Microsoft more and more.

IT'S A DAMN SHAME!!!!

[multimediamogul]

Correct me if I'm wrong, but I feel that the Microsoft and Yahoo markets are quite similar. They both have a chat platform and a loyal fanbase of search users who represent a minority. It makes sense for them to merge.

If Microsoft succesfully aquires Yahoo through hotile takeover or other means, it could have large impact on several aspects of the search industry, especially for commercial websites. Both Yahoo and MSN are easier to optimise for commercial sites compared to Google, and a merger of the tweo would represent a new business search marketing consisting of 30% of the existing market. This could be good for alot of smaller businesses who can't compete in Google. Here is a really good article about some of the differences between the three search engines and the business consequences on this blog.

http://www.demonzmedia.com/DemonzBlog/?p=5

[Aleksandar]

Microsoft favorite U2 song:

"With or with-Yahoo, with or with-Yahoo aha
I can live with or with-Yahoo."