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Microsoft - Yahoo: Does Brute Force Work?

I woke up Friday morning to the news of Microsoft making a $44B offer for Yahoo. My initial reaction: $44B seems like alot for 20% - 25% of the search market plus a crap load of remnant inventory. Or, as the Compete blog notes, $1,200 for each Yahoo visitor. Hmmmm.

The Next Sears Kmart?

Interestingly enough, just a few days before the merger was announced, I read Laura Ries interesting post mortem on the Sears - KMart merger. I took another read of it after hearing about this deal and I couldn't help but swapping in Microsoft for Sears and Yahoo for Kmart as I read.

As sales of its core durable goods started to fall off, Sears started stocking more clothing to compensate. And so began the beginning of the end.

In the 1980s with sales continuing to slide, Sears sought expansion through diversification. Sears bought real estate company Coldwell Banker and stock brokerage firm Dean Witter Reynolds. Sears also launched the Discover credit card.

The purchases culminated in the now infamous “stocks to socks strategy.” Brilliant! You can buy your socks, your stocks, your real estate, your daughter’s prom dress all at Sears. Did it work? Of course not.

Expansion might help in the short term, but in the long term expansion a company unfocused. And an unfocused company stuck in the mushy middle of its category is ripe picking for competition. As an industry matures, competitors come in and steal market share from above you as well as below you. This is exactly what happened to Sears.

If I'm Steve Ballmer, I read that post pretty carefully. I've noted in the past that one of the biggest problems facing Yahoo (and MSN) is that its has no online brand. Yahoo doesn't mean search. It doesn't mean news, entertainment, personals, photos, or even directory anymore. Even though it has all those services. The Yahoo power users are their email users. And right now, that's pretty much the bottom of the barrel in page view/ CPM ratios. So how does this deal change things?

What About Product?

If the past 15 years of shown anything on the web its that attempts to "brute force" your way to the top generally doesn't work. Innovation - and the accompanying massive user adoption - doesn't come from the behemoths, much less two behemoths combining. Excite @ home didn't win the search wars. Neither did Yahoo - Inktomi - overture. No it was a small team in Stanford that came up with an innovative product and captured an audience. Same goes for social networks. Forget Orkut, Yahoo 360, etc. It was a small group out of Harvard. Google video, AOL video, etc. all lost out to a small company with a slick name and a low end flash implementation. And the list goes on and on.

In the true democracy of the web, it's product that wins market share. So ok, MShoo now got lots of page views - great. That's a start. But what's the product plan? Right now you both are bleeding search market share on a monthly basis? How are you going to stop giving ground in the search space? Is there product vision? And what about display? Lots of page views is great, but display advertising CPM's suck. What's the product value-add to marketer's to get them to pay more? Behavioral? Social? Brand? What's the product plan there?

Integration - Excederin Headache #36

The one silver lining in this deal is that there are plenty of cost saving opportunities here. Microsoft and Yahoo have lots of overlapping/ competing services. Combining those into one would likely realize alot of cost savings on the backend. Everything from servers to ops and sales staff to office space could be consolidated.

Sounds great, right? Yeah, good luck with that. The political wars over deciding where to make cuts happens are going to be ugly, at best. Let's see, which search should we use? Yahoo's or Microsoft? Gosh, I bet LOTS of folks from each side have an opinion on that. And if you keep both, well, then where's the cost savings? Same goes with news, email, etc. This sounds like the beginning of the 30 year war.

2 + 2 = 3

Can I think of another industry where two companies with rapidly declining marketshare and similar product offerings decided the best course of action was to combine and brute force their way to success? Why yes, our old friends in the newspaper world. It wasn't so long ago that our old friends at Knight Ridder got put into play and was bought up by one of their rivals, McClatchy for $6.5B. How'd that turn out? Right now, McClatchy's market cap is less than $1B - i.e. not so good for the company or its management.

To be fair, this is not a lone circumstance in the newspaper world. But it is a lesson trying to make the sum of the whole greater than the sum of the parts. Something Microsoft should be worried about.

The good news for Yahoo is that there are lots of old KR people working there now - many of whom were integral in running the company's auction. So, if the reports of the News Corp. bid (or other private equity bids) is true, Yahoo has some good house experience in running an auction.

I Smell Opportunity

The best news about this Microsoft Yahoo deal though is for everyone outside it. Deals like this take lots of time to complete - and as mentioned, the integrations are awful. So the real winners of this deal, IMHO, is everyone not associated with it. With two large players very distracted, the market is ripe for everyone else to move in. After all a good product plus strategic finesse will win out over brute force every time.

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