Microsoft to buy Yahoo? A last desperate attack on Google

| February 1, 2008

The announcement this morning that Microsoft has placed a bid for Yahoo finally confirms chatter that has been doing the rounds for a while.

But before investors get too excited in the hype, it may be worth exploring a few important criticisms of the deal.

As someone who has been a specialist part of the search engine industry for the past 5 years, I think these criticisms will be the make of break as to whether the deal succeeds in the long term.

1. Yahoo Stock has been undervalued for a long time

With a p/e ratio 1/3 of Google’s, but a stock price only 1/30, the indicators are that YHOO stock has been undervalued for a long time.

While analysts fret over advertising income, Yahoo is and has always had a strong advertiser market.

The real let down for Yahoo is the inability to properly roll out its advertising generation outside of the USA. Sure, you can buy Yahoo ads from the UK, but UK webpublishers have no direct access to the Yahoo! Publisher Network (YPN) - the Yahoo equivalent of Google Adsense.

This is important to remember because Google’s Adsense product was rolled out worldwide to third parties years ago, and contributes to 60% of Google’s income.

Yahoo’s failure so far to roll out YPN has seriously restricted its cash flow unnecessarily - but if Yahoo can get around to delivering, the company would have every opportunity to increase revenues and profits and shine.

It has been investor lack of foresight, not lack of ability, that has dogged Yahoo’s stock price.

2. Microsoft is a software company

Once Microsoft shareholders get over the hype and excitement, a cold stone fact will face them - Microsoft generates most of its income from software licences.

That means buying Yahoo would take Microsoft into territory it is has little real experience with, and little reputation.

Sure, Microsoft built its own search engine a couple of years ago, and sure Microsoft now offer their own advertising product - but they are inexperienced, and little regarded in the internet marketplace.

Yahoo’s own failure to roll out YPN worldwide is bad enough, but in Microsoft’s hands YPN would be under the guidance of an inveterate amateur.

While Google have been pushing for online data storage - and Microsoft has tried to ensure it keeps pace - the bottom line is that online markets are still outside of Microsoft’s expertise.

3. Clash of the Titans - merging mega stocks

Microsoft and Yahoo have both focused particularly on developing their own content for users.

Google, on the other hand, has focused on aggregating content from other providers and monetising it.

In short, while Microsoft and Yahoo have a massive online presence, their business models are too similar for easy integration.

If Microsoft bought Yahoo they would be faced with a mammoth problem - that of how to merge and monetise their behemoth catalogues of content.

Additionally, we’ve already seen Yahoo buy up Alta Vista and AllTheWeb - and it took years for Yahoo to extract, develop, and then reuse the intellectual property from these for its own purposes.

For Microsoft and Yahoo to merge successfully, they are going to have to find a way to bring together their massive content libraries, and it would be years before they could do that, let alone begin to monetise what would by then be an extensive collection of out of date content.

4. Brand perception

Microsoft is hated with a passion online by geeks, nerds, whatever you want to call them. And it is geeks who built, innovated, develop, expand, and ultimately, monetise the web.

Yahoo was a well regarded company by the internet community - their initial business model was to help people find useful information, in a similar way to Google, but based on the directory model more than the search model.

Microsoft, on the other hand, is universally hated not simply for its aggressive destruction of potential rival software companies in the 1990′s, but also for Microsoft’s constant war on Linux.

Just as most of the world’s home computers are powered by Microsoft’s Windows, the world’s web servers - powering the internet - are mostly powered on a range of Linux-based operating systems. Apple, Sun, Red Hat, and Ubuntu are all companies who’s core software is essentially built on linux.

The advantage of linux is that it is open source - geeks can change, modify, improve and progress the core operating code of linux as they see fit - and it works so well, and so cost-effectively, that for the past few years Microsoft has seen fit to launch a public relations war on linux.

The result is brand hatred.

So where does that leave Yahoo after a Microsoft takeover? Probably in no better position than Judas Iscariot after the last supper.

If the internet community - who have been such an integral part of Yahoo’s content development strategy, not least from a focus on buying social networks - despise their new Microsoft masters, will this not lead to a withering and final death on a number of assets that Yahoo have tried to make good with?

To succeed online, Microsoft needs a strong brand - but on the internet, Microsoft is at best mistrusted.

Compare to Google, who although have faced their fair share of criticisms over the past year, is still universally loved and well-regarded - and even better, is a company powered by internet geeks who understand the internet.

5. No one can take on Google

The ostensible reason for the bid for Yahoo isn’t just that it’s cheap right now - but also because a merger of the Microsoft and Yahoo assets should potentially make for a real and direct rival to Google.

But as I’ve covered above, Microsoft lacks the experience with internet markets. Oh, sure, Microsoft sells Windows servers and enterprise packages - but these are pitched at businesses, who feel more confident at the idea of paying for support, rather than relying on the brilliant open source community.

It’s not that Microsoft products are seen as better - the UK government’s appalling record with IT demonstrates that - it’s just that Microsoft products are seen as less risk in management terms.

Yet all of this software has been primarily driven at the home market, whereas Google has always been driven at the internet market.

The result is that Microsoft are repeatedly late to the internet party, playing catch up to Google’s lead.

So while bringing together Microsoft and Yahoo assets will create a larger pool of assets, it does nothing in terms of outlook, management, and attitude towards innovation, which Microsoft has always lacked online, and Yahoo has barely been able to keep together - and Google has constantly remained far ahead with.

Overall, an acquisition of Yahoo by Microsoft always seemed an inevitability in order to attempt to even bring a level of direct competition to Google.

However, it was always going to be desperate move, and unless the attitudes within Microsoft and Yahoo change, not least in better treasuring its innovators and geeks and freeing them from restrictive management practices, it will all end up a failure.

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