Microsoft + Yahoo: 1 + 1 ≠ 2

Microsoft made *big* tech news recently by offering to buy Yahoo! for $44.6 billion dollars.

This offer was made for two primary reasons.

1. Microsoft has unsuccessfully thrown billions of dollars and thousands of person-years at search and Web 2.0 services in order to compete online with Google.
2. Yahoo! has been losing ground in search and online ads to Google and in many other online Web 2.0 areas, has unsuccessfully and highly-visibly spent several years trying to turn this situation around, and is worth one-quarter of what it was at its peak in 2000. The final straw was their financial results announced this week in which the "...company reported a nearly 24 percent drop in fourth-quarter profit, offered a 2008 revenue guidance range mostly below Wall Street estimates, and said it would lay off as many as 1,000 employees."

There are hundreds, maybe thousands, of articles and blog posts online discussing and analyzing the Microsoft offer to buy Yahoo! The consensus appears to be that, for better or for worse, either Microsoft or someone else will be buying Yahoo! in the upcoming months. Jerry Yang, the co-founder and CEO of Yahoo! is reputed to dislike the idea of being bought by Microsoft. I don't blame him because Yahoo!'s culture will be all but dead if that happens. A group of upset Flickr users are "staging online protests" and making it clear in various ways that they do not want Microsoft to buy Yahoo! and 'ruin' Flickr.

There are many potential beneficial outcomes of a Microsoft purchase of Yahoo!, including the overall benefit of innovations on the internet. A few of those 'good' outcomes could be:

1. Raising the bar and encouraging Google to churn out more improvements to its already great tools.
2. A search engine that is a strong competitor and viable alternative to Google.
   
3. Reinvigoration of Microsoft's online services, including better email, IM, financial services, online storefronts, digital photos and news.
4. Increased display advertising revenue for Microsoft.
5. A strong presence for Microsoft in Asia (where Yahoo's 40% ownership of Alibaba is doing well)
6. Exposure of future Microsoft initiatives to the huge Yahoo! userbase.

My opinion is that Microsoft will likely end up buying Yahoo!, but that the purchase will be a losing proposition for both companies. The reasons for this are:

1. Very different cultures. Microsoft is a technical, engineer-solutions, enterprise-centric company and Yahoo! is a casual, experience-solutions, consumer-centric company. The best leaders and worker bees at Yahoo! have struggled unsuccessfully for the past year to make the company a leader in online marketing (and a stronger #2 player in search). Bringing the best people at Yahoo! into Microsoft's culture is highly unlikely to make them any more successful than they were within the Yahoo! environment.
2. Probable long integration period. MS and Y! unsuccessfully tried to collaborate against Google for the past year. MS and less-than-suave Steve Ballmer are now attempting a hostile takeover of Y! because of the notable lack of MS success in search and online services and because of Y!'s lousy performance and dropping stock price. MS does not have a good track record for pulling off this type of merger quickly and successfully. Y!'s employees are already unclear about what direction they're supposed to be going after more than a year of reorganizations. All these factors add up to a lonnnnng integration period if Y! is bought by MS. And while the integration is churning along, Google will just be widening its lead in search, in online advertising and, maybe, establishing itself as a leader in several strategic online services areas.
3. Y! doesn't have what MS needs to compete with Google and others in search, ads and online services. Even if the MS culture didn't stomp out all the Y! spirit and even if MS managed to quickly and smoothly integrate Y! into the MS mothership, that doesn't address the real question of what MS needs to strongly challenge Google and others in the world of web 2.0 and web 3.0. Y!'s search engine is no star -- its huge userbase is what has kept Y! as high as it's been in the search engine ratings. Y's online ad system still needs improvements -- the 'new' Panama system hasn't been an overnight success for Y!, as evidenced in it's most recent earnings report. And Yahoo's best showing in online services, like Flickr, Upcoming and Yahoo! Pipes, have strong competiton.

What MS should have done rather than buy Y! at this time is:

1. Continue to grow, through purchases and internal development, a better search engine. The huge userbase of Google search will only switch to a different search engine if it gives them better results. Y!'s engine isn't better than Google's, and buying Y! will not result in a better MS search engine.
2. Continue to grow, through purchases and internal development, better online services. They should buy Zoho. Now. And they should release the basic parts of Zoho for free to give people an alternative to Google Docs, plus throw in one or two free Zoho components that Gdocs doesn't have. They should follow the game-changing, bar-raising strategy of Gmail. Be bold. Don't come out with a me-too product. Instead of releasing SkyDrive (online storage) at the level of 0.5 GB for free, they should provide 50 GB storage for free to a beta group (to trump AOL's Xdrive by a factor of 10) and they should provide some other cool online services for free that maverick MS employees wish they had (and would gladly build).
3. They should integrate aQuantive into their online ad machine and make other purchases or internal developments that continues to improve their online ad offerings.
4. After two of the three above steps are successfully completed, THEN they should buy a large audience, either through purchase of Y! or whatever other company at that point has a large audience available for purchase, or through a large investment in whatever internet service or trend is on the rise at that point in time.
5. Lastly, they should consult with Tim O'Reilly for advice and insight such as that shown in his recent posts about the MS/Y! Long View and about the MS/Y! Strategic Email Assets.

I'm a huge fan and proponent of Google but am even more of a fan of improvements that benefit a large number of internet users (including me). In the short run it would be kind of fun to see the MS/Y! merger stumble with a resultant surge in Google's fortunes. In the long run, however, the bulk of internet users are best served by a Google that hears the scary sounds of strong competitors catching up to it in search and online services. Competition is what forces companies to improve their products (or at least try real hard to improve them).

Just ask Microsoft...