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May. 14, 2008 at 6:58am Eastern by Danny Sullivan
Can Icahn Or Microsoft Stop Google's "Natural Monopoly"
Reports are that Carl Icahn has acquired about 3 percent of Yahoo's shares, apparently in hopes of taking over the company. And then? Well, you know -- maybe go back to Microsoft. Except Microsoft may no longer want to talk, plus that poison pill of a Google-Yahoo ad deal still lurks out there. More below, along with a mini-rant on why people ought to back off Yahoo as a loser, whether Google's "won" the search wars, and why Microsoft ought to drop the entire "long term game" spiel about competing in the search wars.
Icahn May Launch Proxy Fight with Yahoo from CNBC covers the news that Icahn has picked up about 50 million shares of Yahoo recently, part of a plan to gain about three or four Yahoo board seats and maybe force a deal with Microsoft to happen. However, he's not been able to confirm if Microsoft would still be willing to do a deal.
Icahn himself has not said any of this -- it comes off of unnamed sources. But Icahn Buys Yahoo Shares; Mulls Board Proxy Contest from the Wall Street Journal has its own unnamed source telling them the same thing (perhaps the same as CNBC has, of course). The Journal says Icahn will make a decision today. The deadline for board seats is tomorrow.
Carl Icahn Keeps Yahoo in Play over at BusinessWeek is an excellent and clear overview of the current situation and touches on other issues such as how Icahn might not be able to get as much value as Microsoft initially offered from other partnerships or internally.
Meanwhile, "activist" shareholders ponder if there's much they can do to force a change, and A wounded Yahoo may yet tempt 'wolf packs' from MarketWatch covers some of them. But darn if those Yahoo shares just haven't dropped enough to help them push the board out.
Why haven't those shares dropped? Well, Icahn's been buying them, right? Wait, because everyone thinks Yahoo and Microsoft will still get back together! Or who knows? Me, I tend to wonder if perhaps it's because Yahoo wasn't as sucky as even its own investors believed. And Microsoft underscored its value in making its offer. Geez -- back in October, Yahoo was at around $34 per share on its own.
A post over at Silicon Valley Insider is timely for those who just don't get Yahoo's importance. Google Search To Surpass Size of Microsoft Windows in 2009 plots how ad revenue on Google's own sites is approaching the same level of revenue that Microsoft earns off of Windows. Add in the money Microsoft makes from Microsoft Office, and it's still a cash cow, of course.
But the point is this. Google can use its online revenue to underwrite giveaways of software that cuts into Microsoft's key business, applications (and giveaways that are even earning several hundred million dollars, Fortune reports). In contrast, Microsoft's online unit, last to my knowledge, still loses money. "Microsoft is back to its search" is a "long term game" mantra that it has been preaching for ages. That's true of search, but it may very well not be true of Microsoft's ability to become a significant player in terms of share.
Here, Richard Waters at the Financial Times has an excellent article that hits on points I was pondering in my head this weekend (and a bit on my podcast Monday), the idea that Google has won a dominant position now. I'm not the only one, as apparently talk of a Google "natural monopoly" appears to be spreading.
Google triumphant: Search wars look settled is the article. It has plenty of quotes from outsiders viewing Google as "unstoppable." And sure, maybe it will remain search and online ad dependent for some time. But one analyst says that might tide Google over just fine for the next 10 years, and I'd have to agree. It also gets into issues such as Google becoming an operating system for the web that people have no choice but to interact with.
Rich Skrenta, if he reads that article and some of the quotes in it, should have a well deserved "I told you so" feeling after writing his Winner-Take-All: Google and the Third Age of Computing post back in January 2007. He covered why Yahoo should give up to Google and why Microsoft was struggling:
But it shouldn't be surprising that huge successful companies can't make the leap into owning a completely new and different market. New markets bring with them new rules, and require different skills to win. Microsoft has the same shot as any well-funded venture at knocking off Google's crown. But they don't get a special pass just because they make a lot of money selling Word and Excel and have their logo on keyboards.
We get used to seeing the giant squash everything it steps on as it strides through the domain of its market dominance. But sooner or later, the terrain changes, and the old leader can go no further.
Nobody even bothers asking why IBM isn't a player in consumer search. IBM and consumer websites just don't have anything to do with one another. PC software and websites don't have anything to do with each other either.
Five years Microsoft's been after Google, and as my Leaving Las Yahoo: Microsoft's $5 Billion Mistake? covered, all it has to show is declining share of search in the key US market. It's no wonder Microsoft keeps prattling on with its "search is overrated" mantra, as recently voiced again in BusinessWeek:
The most provocative pitch from Lorizio and his sales team will come late this summer. It goes like this: Search advertising is vastly overrated. Today, when a Web surfer is looking for a car, he might type "Chevrolet" into Google and then click on an ad alongside the search results. Google gets all the money for that click, even though other marketing efforts, both online and off, probably helped persuade that person to conduct the search. Ideally, an advertiser would know about all the ads that a potential customer sees before he makes a purchase. "They're trying to say that Google's getting too much credit, and there's probably a lot of truth to that," says Curt Hecht, chief digital officer for the media buying giant Starcom MediaVest Group.
Dude, you go sit with some search marketers for a bit and have them tell you about all the search conversions that aren't tracked properly, like how search generates offline sales that merchants aren't aware of, but where search gets no credit.
Statements like these just make Microsoft's executives seem like if they can't win in search, they'll just downplay it. Or worse, that they just don't get search, as I wrote before:
Since he came on, McAndrews has made a number of comments about search getting "too much credit," such as last month. From my perspective, search has fought to barely get the credit it deserves, and now that the search engines are all display happy, it's going to continue to struggle. Indeed, when McAndrews says:
The current system for tracking ad conversions, while the best available for years, is not optimal because it gives all credit to that last ad seen or clicked -- often a search engine -- and not any credit to other ad units the consumer may have seen prior that helped influence the user to seek more information about the advertiser.
There are plenty of accounts where advertisers are doing poor tracking, so that they don't realize that a search weeks before resulted in a direct navigation and purchase to a site. And please don't get me going on the lifetime value of a search conversion -- the person who finds that perfect site and then never searches for it again. They just keep going back to it, and search gets no further recognition.
My impression is that McAndrews isn't a search person at heart. I don't mean that negatively, nor do I disagree with his stated view that other forms of advertising online and electronically will continue to grow and get recognition. But it sounds like he's going to be the non-search ads vice president, while Nadella's going to be the search ads VP. And that's fine, though if Microsoft is trying to succeed in online advertising, having search segregated off from the cool kids of display, online video ads, gaming ads, and more is probably going to be an issue down the line.
The bottom line is this. I don't think Google will have a "natural monopoly" forever in search, as a reporter asked me about today. My response was that I'm sure they're going to climb higher because search remains at their core and both of their main competitors are pretty troubled. Maybe they will hit the 90% share in the US that Jason Calacanis predicted earlier this year.
It won't hold, of course, not in the long term. I don't think any huge dominance like that holds for various reasons, such as Google's own problems staying nimble or people who will naturally seek an alternative because they just don't like "big" things for various reasons. Microsoft, seeming to have a natural monopoly in all things personal computer for so long, certainly has found it challenged as of late. All those Macbooks, you know. Plus, the government could get involved. See my fictional Deconstructing Google: After The Google Breakup story about that.
This brings us back to Yahoo. Even if Microsoft got Yahoo, the very best thing it could do would be to let Yahoo run things on its own, as if Microsoft didn't exist, as if things didn't have to use Silverlight or Internet Explorer or be set to run on Vista. But since that might be the best way for Microsoft to succeed in search, what does Yahoo need Microsoft for? Is Yahoo CEO Jerry Yang really that blinded against a Microsoft deal because he likes being on his own? Or could he be someone who recognizes that his company -- unlike Microsoft -- has actually been challenging Google and holding its own for far longer?
Screw the Icahn deal. If Microsoft wants to guarantee a win in search, Microsoft CEO Steve Ballmer should pick up the phone and offer what Yang seemed to want, swallow that extra $5 billion. And if he's not going to do that, I don't want to hear any more "long term game" noise. It's the opposite. He needs to demonstrate that his company is going to score some noticeable share wins against Google in the next year. Otherwise, Microsoft's in serious threat of being pushed back off the remaining beachhead it had in the search wars.
For our past coverage on Microhoo, see our Microhoo category. For related discussion on the Icahn news, see here on Techmeme.
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