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