Congratulations, Microsoft: You've Killed Yahoo! and Strengthened Google

At this point Yahoo! is dead man walking. Let's see - a $31 per share sword of Damocles hanging over their head, losing top employees amidst a sea of disappointment and uncertainty (see Horwitz, Brad) and no real plan except to say "Go away." Not a formula for success. Microsoft itself has opened itself up to a Pandora's Box of uncertainty, from both the perspective of "What are you doing spending $40 billion on Yahoo!" and "Sheesh, what is this going to mean for our culture and my job?" It seems to me that the Yahoo!, Microsoft and Google dynamic can best be characterized by the following metaphor: three brothers, one which is 5-years old, one which is 10 and the oldest that is 15. 5, 10, 15. Yahoo! Microsoft. Google.

Yahoo! is 5. Hippy dippy, Silicon Valley circa 1999 culture, never having made the transition to economic powerhouse like its older brothers. And this free-loving eco-chamber is now coming crashing down in the face of harsh market realities. Advertising share down. Search share down. Transition to a de-facto media company a failure. Now what? A plunging share price has made both employee retention difficult and rendered it a sitting duck for a potential buyer. And now its older brother, the big meanie Microsoft, is beating on it yet again. But this time it is an all-out scrap. The 5-year old is swinging but the long, powerful arms of the 10-year old are keeping it at bay. And this beating is causing a bunch of collateral damage - like losing friends, losing respect and losing its future. The 5-year old has and will continue to suffer badly from this encounter, no matter what happens from this point forward. His only hope for survival is by begging for protection and support from its tormentor, Microsoft.

Microsoft is 10. Graduated to middle school, feeling important, feeling like using some new tricks to impress the older kids. But still somewhat rooted to the past, in this case the heavy, software-based desktop franchise that is still the lifeblood of the company. And while Microsoft is picking on Yahoo! it is getting trounced in the most rapidly-growing markets by its older brother, Google. And it isn't pretty. MSN and Microsoft Live are just shadows of the Google search and advertising empire, and it appears that Microsoft has concluded that to make a run at its mighty brother it needs to impose a reign of terror on its younger brother. But this fight has left the 10-year old weakened as well. Looking desperate - why beat up on someone half your age? Clearly not a fair fight. Can't you go it alone with all those resources? Looking stodgy - do you really need those Yahoo! hipsters to breathe some life into that software-heavy culture? Looking financially irresponsible - just because you have $40 billion to spend is this really the best way to enhance shareholder value? All good questions.  But in this case 5+10 doesn't equal 15, because this fight has taken years off both of their lives and the big brother remains above the fray, thinking about love, college and the future. What his younger brothers do is of little consequence, except insofar as their might be some good toys and friends to pick up after the fighting is over.

Google is 15. He is laughing - hard. "Boy, are my kid brothers dopes! I'm looking forward, living large, walking tall. I'm in high school but college is around the corner. I'm going to start my own company. And if my idiot brothers lose some of their friends because of the fight, they can come work with me on my company. And if my younger brother falls ill, very ill, I'll come and visit him and send my best but there is little I can do to help." Google must be thinking "Does Microsoft really want Yahoo! or are they simply trying to kill Yahoo! Either way, I win." Google will pick up top pros from both Microsoft and Yahoo!, who no longer want to deal with uncertainty and questionable business strategy, and for this Google will pay precisely nothing. Microsoft may end up spending $40 billion for something that has precious little value, as top human capital which is the real engine of growth will simply walk. Is the advertising engine and the other Yahoo! assets really worth buying the company, much less paying the control premium? And this doesn't even take into account the disruption and value destruction arising from the integration process, which is at any time and always a hairball.

And the end of the day those at Google must be shaking their heads. I think Larry, Sergey and Eric should send Steve a really expensive bouquet of flowers. He has simply made their year.

Comments

[Mark Harrison]

WARNING: This comment is deliberately contrarian :-)

I agree that Yahoo! have done a very very very dumb thing, and that the defence they've put up is broadly equivalent to putting their hands over their ears, and shouting "la, la, la, la, I can't HEAR you!"

If I were a biggish minority shareholder in Yahoo!, I'd be screaming blue murder and reaching for my lawyers for the board's action. If only Microsoft had people with such shareholdings...

... oh, wait a minute...

So, as you say, the Sword of Damocles falls - Yahoo!'s board run away faster than you can say "acting in the best interests of the shareholders", the stocks go more toxic than a sheaf of swampland securitisation paper, and Microsoft pick up the business for significantly LESS than their original offer.

Even without that, though - look beyond the headline search business - take Yahoo!, grab the juicy bits needed to fight in the Cloud-hosting space, take the Ad customers (but not the technology) and port the data over, and rejoice in the walled gardens you've just acquired to which you can pimp the next generation of MS Multitouch Toys.