Microsoft Won't Take No For Answer

According to at least a story in the Financial Times, Microsoft has proposed to Yahoo something between a partnership and full buy-out. The subject of speculation is whether Microsoft is trying to buy Yahoo search.

Even though Google is huddling over what to do, as they find the combination threatening (and want to partner with Yahoo themselves), I don't see why. They might lose the revenue opportunity that advertising on Yahoo search might bring, and that would be a pain. But there is nothing that Microsoft would add to Yahoo search to make it particularly enticing. They can't integrate it into Windows because of their past anti-trust dealings, and if they had something compelling for users, you'd think it would have come out on MSN already.

Microsoft continues to push only because it doesn't know what else to do, and management there isn't willing to encourage real innovation because, well, it's not guaranteed to be a blockbuster. Here is where Microsoft could learn a whole lot from the old IBM. Not bloated bureaucracy - the Redmond company already has that in spades. No, it's the concept of a research lab that can hit on not just innovation, but out and out new concepts. They could even do it in software alone and fund it for what would be a song to them. The current state of affairs is management by fear. Perhaps the company could use someone at the top who is a little bolder. It will take some daring to move in some direction, because change is inherently threatening to the old order, and so far the company has communicated that it wants to stay exactly where it is.

MicroWahoo is a Corporate Disaster

They want to do a deal, they don't want to do a deal - the only way to figure out where the two companies have been going is to find a lower-case "o" oracle. I think that the CEO and board at Yahoo are now toast because they turned down a major premium on a stock price that hasn't yet heard a value low enough to make it satisfied. Push will come to shove, and look for either major resignations or institutional investors to push for a dissident slate of directors.

As for Microsoft, if the Yahoo deal was that important, what happens to Ballmer for not being able to make it happen? I'd ask if there was a plan B to find a direction for folks in Redmond, but I think that the Yahoo pitch was just whistling in the dark, because it was essentially an approach that was a me-too-more-of-the-same strategy. In other words, they aren't moving anywhere and probably won't be in the near future. Of couse, there is that little probelm of needing to protect the revenue base of Windows and Office.

Microhoo: Why a Microsoft Acquisition of Yahoo Won't Change a Thing

Money can buy almost anything you want, and for Microsoft, that would be Yahoo – for something over its original bid of $44 billion. Many experts agree that the software giant will likely have its way. But getting what you want can be different from getting what you need, which may not be available at any price.

During a February 1 conference call, Microsoft CEO Steve Ballmer said that acquisition talks had occurred “off and on for the last 18 months.” Microsoft wants Yahoo badly enough to offer an amount greater than its combined net income from 2005, 2006, and 2007 because it is stuck.

Once PCs ruled supreme; now the Internet is king, Microsoft is “struggling,” says N. Venkat Venkatraman, a professor of management at Boston University. Traditional Windows and Office products – 80 percent of company revenues – are mature businesses that won’t fuel accustomed growth. For example, the newest version of Windows, Vista, has had relatively poor sales because of technical problems and a chilly user reception. According to statistics from NetApplications.com, it has a market share of only 12 percent market, versus the nearly 75 percent for XP, the older version. To avoid future financial stagnation, needs a way to grow.

Online advertising seems like the answer to a prayer. According to Kevin Johnson, Microsoft president of platforms and services, it is currently worth $40 billion a year, and may double in size over the next three years.

But Microsoft has had a problem called Google. “I can’t think of a company that has controlled the direction of an industry [to the same degree],” says William Mahnic, professor of banking & finance at Case Western Reserve University. According to Jeffrey Rayport, a partner in consulting firm Monitor Group, Google makes twice the online ad revenue as Microsoft and Yahoo put together, with half the user traffic. Furthermore, the Internet whiz is giving away software functions – such as spreadsheets, word processors, and email programs – that that directly competes with Microsoft’s cash cows.

Microsoft’s has had a roughly 6 percent share of online advertising for a few years, which is “essentially been flat,” according to Karsten Weide, program director of digital media and entertainment for market analyst IDC. But add the 11 percent share of Yahoo, and “it would give them a much better fighting chance” against Google’s 24 percent.

Johnson said that the combination would offer a number of strengths. By eliminating duplicated R&D, freed-up staff could “improve our ability to drive innovation in emerging areas such as video, mobile, and online commerce.” Yahoo and Microsoft have both proven that trying to charge users for services is literally a losing game. That’s how Google has moved ahead: by providing a lot of free content and delivering ads that tie in with someone’s interest.

So, if online advertising is the name of the financial game, why focus on R&D? Because advertising online must still draw audience the way it must in print or television. On the Internet, that means novel and clever applications and services. R&D is supposed to deliver that innovation, as well as finding ways to use data about users to effectively pair ads with people.

Plus, Microsoft management is betting that by combining forces with Yahoo, the combined online advertising revenues would be better, while cutting redundant costs would actually mean more profit to keep shareholders happy. It all sounds smart on the surface, and Weide says, “We think a merger between Microsoft and Yahoo would make a lot of sense.”

But there’s a problem. Neither Microsoft nor Yahoo has been setting records in making money from online audiences. Between 2005 and 2006, Yahoo grew revenue by about 22 percent. Microsoft grew by over 11 percent. Google grew by close to 73 percent. It’s gross profit for 2006 was bigger than its gross revenue from 2005, and it’s significantly larger than Yahoo. Expecting the simple combination of the two companies to better address Google’s market dominance and momentum is unrealistic.

To fend off Google, Microsoft doesn’t need more of the same old thing, whether its own packaged software past or Yahoo’s online business. It needs entrepreneurial spark and invention. But innovation is the result of people, and getting the employees at Yahoo and Microsoft to work effectively in this way will be incredibly difficult.

First there are practicalities. “They’ve not done an acquisition of this size before,” notes Georgia Institute of Technology finance professor Narayanan Jayaraman. The mistakes that could come from an acquisition badly done could cost Microsoft the efficiencies and focus it is counting on.

The two groups may also get along badly. “[Yahoo employees are] always making jokes about Microsoft and the evil empire,” says Mike Grishaver, now CEO of Thingfo but until last fall a director of product management at Yahoo. Rayport agrees: “You’re talking about two cultures that are not just far apart, but that have active animosity.” Should key Yahoo employees become annoyed, they can find many other opportunities in Silicon Valley.

Furthermore, neither Microsoft nor Yahoo has shown the particular type of innovation that is necessary. “[In 2005] I laid out 13 things that Microsoft should buy or start building,” says Robert Scoble, a former Microsoft developer who used to write a popular blog about the company when still an employee there. But management turned down all the ideas because they weren’t big enough at the time to warrant Microsoft’s interest. Those small potatoes included MySpace, photo sharing site Flickr (later purchased by Yahoo), and Internet phone service Skype.

As for Yahoo, its glory days of Internet innovation may also be over. “The problem that Yahoo’s facing, and the reason they’ve been going downhill, is management bloat and lack of vision from the top,” Grishaver says. “When I started at Yahoo, the teams were small and days were about getting things done. Then they started to hire management layer over management layer over management layer who just go to meetings all day.”

In other words, Microsoft’s planned purchase of Yahoo could be nothing more than an expensive “me too” strategy of trying to follow Google, without an infusion of business innovation to start leading. And in the world of the Internet, another term for following is being an also-ran. The tens of billions of dollars could come to nothing more than an expensive way for Microsoft to stay exactly where it is now.

Yahoo Shows Strategic No-No

Terry Semel is out and company co-founder Jerry Yang is in as Yahoo CEO. After a reorganization in December, continued disappointing earnings (while Semel earned an estimated $71.1 million last year, as estimated by the Wall Street Journal), and operational snafus, the company felt the need for changes.

it's quite a change in fortunes. According to the Journal, the man originally was a savior:

Mr. Semel, 64 years old, is widely credited with helping to focus a foundering Yahoo following his 2001 arrival and helping it ride the recovery in online advertising. The Sunnyvale, Calif., company is one of the largest sellers of such ads, and has played a key role in leading some name-brand companies to increase their marketing on the Web.

Then key managers left, they weren't replaced, the company couldn't digest the acquisition of an Internet ad platform company quickly enough, and things generally went badly when Google continued to out pace Yahoo. So now there's talk of possibly selling the company, or partnering, or ... something.

I wonder if management will really take a page out of Google's book. It's not to copy, but to better understand how Google gets so much right where it counts - with customers. They actually seem to listen, because nothing else would explain how they would continue to pick up share in areas filled with the fickle. An audience of over 100 million is a significant asset. Instead of playing catch-up in search and search advertising, why not talk to the customers big-time? Find out what they want? Not through focus groups, but by getting managers to actually talk to the people the company deals with, learn what they want, what they like, what's missing. Now that would be a radical solution.

Google Wants to Know Everything - About You

According to a piece in the Financial Times (I'm not sure how this got to be a free link, but who am I to complain?), Google wants to know everything about everybody. Literally:

Asked how Google might look in five years’ time, Mr Schmidt said: "We are very early in the total information we have within Google. The algorithms will get better and we will get better at personalisation. The goal is to enable Google users to be able to ask the question such as 'What shall I do tomorrow?' and 'What job shall I take?'"

There you have it - Google with the gloves off. Aside from questions of privacy, civil liberty, and propriety this naturally raises, there are some serious business issues.

To the degree that Google succeeds, it puts virtually all businesses in its debt. Depending on how it decides to analyze and answer such questions, it directs people in their choices. If your company is on the outs with Google, might there be a chance that it freezes out your chances with customers? Will you have to - eventually - pay a fee to remain in the running, if not with the current management, then with a future team? People who think that all the tumult over Google and Yahoo and Microsoft is solely about online advertising aren't looking at the bigger pictures. In a society where an increasing number of people want to be told what to do, having an ever-increasing collection of information on them as well as an ability to be a front end to the Internet means controlling business beyond what can happen even in a monopoly.

Microsoft Yodels Yahoo

(The following is a story of mine running translated right now in Newsweek Japan)

It only took one initial report a little over a week ago about potential merger talks between Microsoft and Yahoo to generate some of the biggest buzz the online industry has seen. Even as further stories suggested that the two companies were actually considering a strategic online partnership, interest was still intense because of one word: Google.

The search engine company has competed online with Yahoo and Microsoft and thrashed them both, becoming the premier destination for finding information and delivering ads. And so Yahoo and Microsoft hope that somehow the combination of the former’s audience – the top ranking web destination according to site ranking service Alexa.com, with visits from more than 25 percent of all global Internet users – and the latter’s technology leadership might let them compete more effectively.

Were this any other industry, the combined forces would be powerful: almost $51 billion in 2006 revenue and well over 80,000 employees. However, on the Internet, size isn’t enough. Customers must identify a company and its site as the preferred spot to get something done, whether to keep in contact with friends, share video, get news, or look for some piece of information. Lack that connection with people, and your business is bound for bad times. Microsoft and Yahoo is just one example in the online industry of how companies are trying to use alliances to gain a spot in the hearts of customers – though it’s not clear that the approach will often work.

Finding examples of corporations that are using acquisitions for greater customer contact is easy. For example, Yahoo bought the popular photo sharing site Flickr (recently closing its own service, Yahoo Photos, because so few people used it). News Corp acquired personal networking destination MySpace as part of Fox Interactive Media, the Internet division the company created in 2005. “That’s working out quite well,” says a top venture capitalist Todd Dagres of Spark Capital. “MySpace already had presence in the online world that Fox didn’t.”

The difference between these acquisitions and a possible Microsoft-Yahoo marriage is that they were targeted at popular but still niche properties that had enthusiastic customer bases. Amalgamating more broadly based companies, however, is too unfocused. Unless companies can catch the eye of the public, they will remain stuck where they are as their competitors blow past them.

Google is a danger to Microsoft and Yahoo because it competes with them in the vital areas of search engine services and online advertising, being far more successful at both. According to NielsenNetRatings, Google’s share of U.S. searches in March was 53.7 percent, while Yahoo had 21.8 percent, and Microsoft, 10.1 percent. So Google brings more people in who want information.

Then it delivers small ads whose content matches the search terms that users choose. The result is advertisements that people often actually want to read – and many advertisers willing to pay lots of money to Google. According to Karsten Weide, program director of digital media and entertainment at market researcher IDC, Yahoo was the online advertising leader until 2005, when Google blew past them. Last year, according to research firm eMarketer, Yahoo had 15% of U.S. paid search advertising, compared to Google’s 58.7%, and next year it projects Google as taking over three-quarters. “It’s dominant already and growing so fast that it will be difficult for the other players to catch up,” he says.

That spells trouble for the other two. According to Yahoo’s 2006 annual report, 88 percent of the company’s revenue came from advertisers. And while 80 percent of Microsoft’s income is from selling copies of Windows and Office product families, the company sees its economic future elsewhere because the old software lines are now mature businesses that are unlikely to offer high rates of business growth. Before becoming vice president of media development at PodTech.net, Robert Scoble was a Microsoft developer who also wrote a popular blog about the company. He remembers upper management stressing two years ago “that the growth of the company will come from advertising, not from selling another copy of Windows or another copy of Office.”

Yet Microsoft’s online advertising revenues have been flat at about $2.3 billion for the last four years while the industry has grown at an annual rate of over 30 percent, according to Weide. That means the company has faced a constantly declining market share. “I’m at a loss,” he says. “How do you pull zero percent in a growth climate like that? It’s an accomplishment in itself.”

The problem is that bigger is not necessarily better on the Internet. The attitude comes from an old strategy of traditional industries. By acquiring other businesses, a company could create economies of scale, driving down manufacturing and distribution costs and pressuring competitors. On the Internet, though, a small and reasonably funded company can quickly reach millions of consumers: look at MySpace or YouTube.

Microsoft’s difficulty is that it understands selling packaged software, not the media world of online, so it tries to copy someone else’s success. According to Scoble, Microsoft is preoccupied with FOG – fear of Google. “Microsoft has some technologies that are really good, but they’re in clone world right now,” Scoble says. “They’re trying to clone everything that Google is doing.” For example, Microsoft is emphasizing online ad sales and even giving away use of software business applications on its Live.com site. Unfortunately the drive to copy another means that the company remains reactive to the Internet and not developing the new services that will catapult it to the lead among consumers.

Yahoo has a grasp of media, but can’t force how consumers will react. Look at its acquisition of photo sharing service Flickr. That step was necessary because Yahoo’s own photo sharing service, Yahoo Photos, simply never caught on with users. “Now you’re going to bring that together with a behemoth like Microsoft and be able to operate in a nimble and innovate way in an industry that really thrives on rapid [change]?” asks Willan Johnson, formerly a vice president at Yahoo and now general manager of SupplyFrame.com. “Many have speculated that if that deal went through, you’d want to buy Google stock.”

In the view of Kim Caughey, a senior investment analyst at Fort Pitt Capital Group, the combined entity would have a hard time hiring the “cool people … to continually create new products to drive people to your web sites and capture eyeballs.” They would find a large-scale company a bad fit. “If they have a really great idea, venture capital will give them money,” she says.

Smaller entrepreneurial divisions might do the trick, but large companies typically don’t have interest in such endeavors because the returns are too small. Scoble found this when he worked at Microsoft and in 2005 urged management to consider purchasing such companies as MySpace, Flickr, or Internet phone service Skype when they were much smaller and less expensive to acquire. “I was telling them to pay attention to something that hadn’t yet sold for $20 million,” he remembers. “I asked, ‘Why aren’t you doing things in this market?’ and the answer was, ‘We’re too busy … running multi-billion dollar businesses.’” By the time large companies see the value, it’s often too late to acquire the truly innovative businesses that are now literally worth billions of dollars.

There still might be sense in a close alliance between Microsoft and Yahoo, even if not for an online consumer market. Caughey says there might be natural synergy for corporate customers – an integration of Microsoft’s commanding presence on desktops with Yahoo’s search technology. The two could become a way to pull together data scattered throughout a large company in the form of word processing documents, spreadsheets, and other files – an area that has caught Google’s eye. Or Yahoo and Microsoft could develop software and systems that would allow others to create the next big thing for consumers. Maybe even Google developers could give the products a test. They probably wouldn’t have to search too hard to find them.