Leaving Las Yahoo: Microsoft’s $5 Billion Mistake?
walkaway from the Yahoo deal is indeed a ploy to save $5 billion, Microsoft
CEO Steve Ballmer may have proven himself pennywise and pound foolish. He was
prepared to spend billions to finally make Microsoft a serious rival to Google.
For a bit more, he may have destroyed Microsoft’s chance to get there.
Despite what I’m about to write, I like Microsoft. I’ve got many friends who
work there (and at Google & Yahoo), and as a company, I actually want Microsoft
(along with Yahoo) to provide a strong counter-balance to Google.
Five Years, Nothing For Microsoft To Show
Microsoft’s basic problem is this.
After five years of
going after Google in search, Microsoft has failed to make a dent in the big G.
Millions — billions, I suppose — have been spent on the project. Huge
technological effort has gone into the challenge. What’s to show for it?
Google’s at all-time highs in the US and Microsoft has lost share.
Three out of four
major ratings services now report Microsoft to have a single digit share of
the US audience. Microsoft hasn’t even been able to challenge Yahoo (still in
low double-digits), much less Google. In desperation, Microsoft signaled its
defeat by proposing
to buy Yahoo and get into the number two spot by proxy.
Maybe Microsoft will still get Yahoo. Certainly Ballmer’s letter, annotated
below, sends a warning that steps Yahoo thinks it can take to remain independent
may backfire. Perhaps Yahoo’s stock will plunge, and along with lawsuits, cause
a change in Yahoo’s board that makes a Microsoft deal ultimately happen. But
then again, maybe Yahoo will pull off being the
number two in search and
online advertising that Microsoft wants to be, while Microsoft becomes
weaker as the foundations of what it’s built on, the Windows operating system
and software, begin to erode in the face of
Microsoft has no brand in search. It literally has no brand. Relatively
speaking, virtually no one knows what Live Search is (more
actually use MSN Search) or who is behind it (Microsoft, by the way), nor does
Live Search have widespread adoption. As a product, there are a few features that are
innovative (infinite scroll in image search, video previews), and it has been a
leader in some areas (such as allowing users to annotate maps). But no one
outside of product placement is going to say they "Live Search it." They’re
going to "Google it" because Google is the search brand that is largely known
and loved by the typical consumer.
The Live Search branding mess is evident just by talking with any Microsoft
employee. Kid with them about how bad the name is, and they either readily agree
or smile with embarrassment. If Microsoft morale is down after this flubbed deal
with Yahoo, I’d hope the company execs at least throw them a booster by dumping
the Live brand and going back to MSN. Or here’s a thought — just call the damn
thing "Microsoft Search." At least consumers DO know who Microsoft is.
Aside from the branding mess, we’ve had a
revolving door of
Microsoft executives who all come in very keen on seeing Microsoft do well
in search but haven’t gotten it there. Pick an exec, and you’ll find they’ve
done their homework about search.
They all make the right
noises about search still being in its infancy, how the PC industry had
radical changes over its 30 year history, and how it is too early to rule anyone
(including Microsoft) out. All of this is true. But it’s also
the same big-time spin
we got from day one of Microsoft’s effort to rule search.
When’s "It’s All Still New" Old?
How long does Microsoft get? At what point does Microsoft seem to be pushing
the O/S 2 to Google’s Windows, the operating system that’s just never going to
catch on? Five years doesn’t sound that long until you consider that Google
itself isn’t even 10 years old. With everything Microsoft’s put into search, how
has it managed to achieve less than Google has, in terms of marketshare, in that
period of time?
Well, it’ll get there. After all, few companies have the resources to jump
into search as Microsoft has. So Microsoft tells us, and it’s sort of true, in
terms of web search. Then again,
people like Cuill
would have you reconsider that assumption for web search. In video search, which
relied on providing free video hosting, YouTube came along and trumped both
Microsoft and Google.
Microsoft, which rightly makes a big deal that it might succeed in vertical
search areas because of how new they are, also simultaneously by that pitch
makes the case that anyone might succeed in vertical search. And if you’re top
talent, you might decide to do that cool vertical search thing on your own, not
within Microsoft. Certainly that might prove more lucrative.
Could Microsoft really have flubbed it in an unrecoverable way with search?
Sure. As I’ve said, it has failed to build share. It could well continue to lose
share while both Google and Yahoo grow. And if Yahoo grows, it could become even
too pricey for Microsoft to acquire in the future. If there can only be two
players — as Microsoft has tried to suggest on occasion — it might be that in
search, Microsoft gets shut out.
I’ve been asked by many people what I thought should happen in the deal, what
I’d like to see happen, what each of the players should do. I don’t have clear
Buying Yahoo is probably the single most important thing Microsoft could do to
really leapfrog in search, because so much revolves around having a sizable
audience. But as I’ve
written before, a Yahoo-Microsoft combination is by no means a guarantee for
Microsoft’s success. The combo would have been fraught with difficulties. To me,
the biggest likely issue was that I doubt Microsoft would have let Yahoo run on
its own as the flagship brand and independent unit handling search. Still, no
matter how awkward the merger might be, it would have sealed Microsoft in for
some time to come as the number two in search. Instead, it looks likely to be
number three for the near-to-medium term.
Ballmer’s Threatening Letter
It’s not over yet, of course. Microsoft has walked away from the deal, but
publicly, it’s signaled a war that might drive Yahoo back to the table —
perhaps at a cheaper cost. Let’s go to Ballmer’s
letter sent yesterday to Yahoo CEO Jerry Yang about dropping the deal.
It recaps the price gap. Microsoft originally offered $31 per share, which at
the time of the offer was worth $45 billion. Last week, Microsoft upped that to
$33 per share — another $5 billion in total. But Yahoo apparently wanted $37
per share, and that was $5 billion more too much.
Microsoft, of course, could have fought a hostile takeover to gain Yahoo —
as many were expecting it to do. But Yahoo has made clear to Microsoft that if
it attempts this, Yahoo will wed itself to Google and effectively ruin itself
for Microsoft’s purposes. As Ballmer’s letter describes it:
We regard with particular concern your apparent planning to respond to a
“hostile” bid by pursuing a new arrangement that would involve or lead to the
outsourcing to Google of key paid Internet search terms offered by Yahoo!
today. In our view, such an arrangement with the dominant search provider
would make an acquisition of Yahoo! undesirable to us for a number of reasons
In particular, Yahoo
has experimented with using Google’s ads. If Microsoft tries to force itself
on Yahoo, then Yahoo appears ready to sign a long-term deal with Google that
might prove difficult or expensive for Microsoft get out of. Talk about the
ultimate poison pill. To make such a threat, Yahoo must also know that Google is
ready to back it with a lucrative revenue guarantee as the company has done for
others such as MySpace and AOL — so lucrative that it might keep Yahoo
Ballmer’s letter then attempts to knock down Yahoo’s plans blow-by blow:
First, it would fundamentally undermine Yahoo!’s own strategy and long-term
viability by encouraging advertisers to use Google as opposed to your Panama
paid search system.
Not necessarily. I was one
who thought Yahoo
would be shooting itself in the foot by dumping its own ad program. But if
Yahoo’s management wants to stay independent, sacrificing paid search is a way
to do this. That’s because it might be only a short-term sacrifice.
By accounts, Yahoo is not exclusively going to use Google’s ads. It will
continue to use its own system in addition to Google’s. Taking on Google lets
Yahoo buy some time to learn and improve its existing system and play catch-up
to Google. (As a side note, it’s just weird to see Yahoo talking about the
"Panama" paid search system — a code name for improvements to the Yahoo Search
Marketing system that
were rolled out over a year ago. Still using the code name just feels
out-of-touch. But maybe Yahoo is continuing to use it as well.)
Ballmer then warns:
This would also fragment your search advertising and display advertising
strategies and the ecosystem surrounding them. This would undermine the
reliance on your display advertising business to fuel future growth.
Sound risky for Yahoo to do. Not necessarily. Imagine it this way. Pretend
Yahoo is a company that sells both radio and TV ads. It decides to outsource the
radio ads. Does that put TV ads at risk? Perhaps not, considering that not
everyone that buys radio also wants TV and vice-versa.
Search ads are completely different creatures from display ads. This
is a fundamental concept that executives from the major companies selling them
confuse — both accidentally and intentionally.
- A search ad appears before a consumer with an active desire for something,
targeted to their particular need, and thus is one of the most valuable forms
of advertising we have today.
- A display ad appears before a consumer that is often not considering
buying something nor even thinking about the particular need being shown by
the display ad. This is why it does not generally convert as well as search.
Display ads can build desire — can indeed work with search and even tie into
past search behavior. But you can also argue
focusing just on display, Yahoo —
already the leader
— could take that space above and beyond where it is today without being
distracted by search.
Next, Ballmer puts out a "come work for us" sign to Yahoo employees:
Given this, it would impair Yahoo’s ability to retain the talented
engineers working on advertising systems that are important to our interest in
a combination of our companies.
My read of this is Ballmer saying that Yahoo working with Google would mean
it is not serious about the search ads side of the house. Perhaps that
fear-mongering will work. But then again, working with Google provides an
attractive challenge to Yahoo employees that they cannot get from Microsoft.
They can work with a search volume well above that of Microsoft’s, plus actively
see how what they are doing compares to Google monetization.
As you’d expect, Ballmer next brings out the legal threats:
In addition, it would raise a host of regulatory and legal problems that no
acquirer, including Microsoft, would want to inherit. Among other things, this
would consolidate market share with the already-dominant paid search provider
in a manner that would reduce competition and choice in the marketplace
In other words, "you won’t get away with it, Yahoo!" Microsoft is warning
that they’ll be challenging any search ads partnership. Unfortunately for
Microsoft, since Google is not actually buying Yahoo, Yahoo indeed might get
away with it. So far, the
signs haven’t been
Moreover, Microsoft continues to play a dangerous game talking about consumer
choice in the marketplace when it by far remains the company most dominant in
the computer world. Imagine a court case where Google comes in and argues that
Microsoft is trying to limit Google’s ability to partner with people on ads
because those ad revenues are in turn fueling Google’s ability to offer software
to people for free; i.e., Microsoft is trying to block the deal to protect its
computer hegemony. Spun that way, a Yahoo-Google deal could improve consumer
choice in some areas, not harm it.
Next, more legal rumblings. Price fixing!
This would also effectively enable Google to set the prices for key search
terms on both their and your search platforms and, in the process, raise
prices charged to advertisers on Yahoo. In addition to whatever resulting
legal problems, this seems unwise from a business perspective unless in fact
one simply wishes to use this as a vehicle to exit the paid search business in
favor of Google.
Really, an amazing statement — the most hostile of the letter. Microsoft is
setting up a case to say Google is fixing prices. Yep, Google has a pretty
"black box" pricing system where no one quite knows what’s going on. But that
system actually lowers prices for some advertisers who perform well. The Google
system is designed to maximize revenue, which is not the same thing as raising
or fixing prices.
The concluding point:
It could foreclose any chance of a combination with any other search
provider that is not already relying on Google’s search services.
Such as? Clearly, it’s not going to be Microsoft, at the price Microsoft
wants to pay. The only other notable search provider is Ask, and Yahoo has no
need to combine with Ask.
What happens if Yahoo stays independent? Has Yang pulled off a coup? Will he
build a company that’s worth more than $50 billion in value for his
Again, I have no clear answers — nor does anyone, of course. At the moment,
I can’t help but feel the letter of "calling the deal off" is really a last
ditch effort by Ballmer to get Yahoo back to the negotiating table. There’s
still time for Yang to go back before tomorrow’s opening day on the stock
market, where a possible stock decline would put him in a weaker position. But
the variables! Microsoft’s stock itself might also plunge, taking the value of a
cash-stock deal again lower.
As an independent, Yahoo should have a strong future. Frankly, I feel the
company was undervalued to begin with — constantly overlooked as the number two
in a battle over search that many analysts over the years mistakenly have
presumed was between Google and Microsoft. Yahoo has had to pull back and lost
in some countries outside the US, but similarly, it could strike a deal with
Microsoft to be a partner in some of these places.
At the very least, I certainly feel that Yahoo understands the web and future
of online better than Microsoft does. Yahoo was born of the web. Yahoo doesn’t
have an operating system to protect or software revenues that generate billions
and make it hard to offer free apps and services, if it so chooses. In spirit,
Yahoo is far more a competitor now to Google than Microsoft is.
If the two, Microsoft and Yahoo, do come together somehow, personally, I’d
hope Yahoo’s allowed to run its course in a largely semi-autonomous fashion.
Microsoft wants Yahoo because of its success, a success especially in search
that Microsoft hasn’t yet been able to replicate. Let Yahoo continue to run that
space, put everything into the player that has earned and maintained the number
two spot, and perhaps that’s what will get it closer to number one.
There’s much discussion on the news, of course. I’d encourage everyone to
check out the following resources:
Microsoft walks: Five reasons why it’s a good move: From Larry Dignan at
ZDNet Between The Lines, this post covers well argued reasons why Ballmer should have
walked away from Yahoo, including how Microsoft’s own shareholders might have
balked at the deal, how the EU might have blocked a Microsoft-Yahoo tie-up, the
duplication of services, and more.
Microsoft takes its ball and leaves Yahoo on the Web 2.0 playground: From
long-time Microsoft watcher Mary Jo Foley. "I’d go so far as to say Microsoft’s
decision to walk restores my faith in the future of the company," she writes —
arguing that the money could be better spent. I’d argue that maybe Microsoft
just offered too much to begin with. Rather than mark-up Yahoo’s stock at 60% of
the current asking price, why didn’t they offer slightly above rather than
effectively force the market to jump Yahoo immediately to that level? Perhaps
Microsoft could have had Yahoo and billions left over.
MicroHoo: The Odd Couple Meetings Led Nowhere: From Kara Swisher at
AllThingsD, the post recaps meetings that have gone on for the past few weeks in between
the two companies. It covers Yang wanting $38 per share, his worries that a
combined entity might be rejected by regulators as too dominant in some areas
such as email, and the idea of just doing a search ads deal with Microsoft.
Microsoft Withdraws Its Bid for Yahoo: From the New York Times, a very nice
telling of meetings this weekend and over the past weeks, possible ways
forwards, possible partnership blocks all around — an excellent overview.
Microsoft Withdraws Yahoo Offer After Attempt to Bridge Gap in Price: From
the Wall Street Journal; reports sources on both sides saying the walkaway isn’t
a negotiating tactic.
Yahoo’s Nightmare Scenario: I’m From Google and I’m Here to Help!: Also from
Kara Swisher, this post raises the specter that by outsourcing to Google, Yahoo will
become just another Google outpost like AOL — and dwindle like AOL. But the
comparison isn’t accurate. AOL
sold its own core
search technology way back in the 90s, nor was it that strong of a search player.
AOL’s traffic seemed largely to have come off its lock-in with internet access
accounts, and as that business went away, so did much of AOL’s share. AOL has
had many other troubles, of course. Yahoo is keeping core search tech, already
will keep thousands of advertisers in its existing search ads program, and is
far more focused than AOL.
Analysis of the Microsoft Decision, Plus Yahoo’s Hari-Kari: Paul Kedrosky
assigns blame all around: "This has a been a risky and poorly managed affair
from end-to-end. Both CEOs deserve immense blame — Ballmer for vacillating;
Yang for running a public company without the foremost regard for shareholders
— and they are likely to be the two people who suffer the most indignities
(including possible termination) over the coming weeks and months."
Email From Steve Ballmer To All Microsoft Employees: From TechCrunch,
Ballmer tells the troops: "Ultimately, our goal is to build the industry-leading
business in search, online advertising, media, and social networking. We are
absolutely committed to being the leader in each of these areas. Now is the time
to do what we have always done best—be tenacious, focus on the long term,
innovate, and keep working hard."
That just makes me ask — and should make anyone ask — if you expect you can
do this alone now, why offer up to $50 billion in the first place? Why not have
stuck to the long-term plan rather than the drama of the past three months?
The answer, in part, from another Wall Street Journal
article just before the walkout seems to be that Microsoft just felt all
that money would get them there more quickly:
WSJ: Yahoo is the biggest, easiest way to get that
scale. But if that doesn’t happen, are other acquisitions necessary to get
BALLMER: No, no, not at all. It could just take more
time. Look at all the properties on the Internet — everything on the
Internet. There’s really only five or six that have any scale. Worldwide,
you’d maybe get seven or eight. You have MySpace, Facebook, MSN, Yahoo,
Google, Baidu, AOL. But then — boom — it really falls dramatically after
that. So there are really a few guys and [if] something works, it works. And
if it doesn’t, it doesn’t. But then we’re just taking longer to build the
scale [on our own].
(Some images used under license from Shutterstock.com.)
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