Wednesday, May 03, 2006

Yahoo, here comes Microsoft?

Robert Guth and Kevin Delaney at the WSJ report that Microsoft is considering acquiring part of Yahoo. Some excerpts:
One faction within Microsoft Corp. is promoting a bold strategy in the company's battle with Google Inc: Join forces with Yahoo Inc.

A Microsoft-Yahoo combination could merge complementary strengths. To succeed in Internet-search advertising -- the business driving Google's growth -- a competitor needs three core elements: strong technology, a mass of consumers and a universe of different advertisers.

Microsoft is spending untold hundreds of millions of dollars on the technology piece, but it doesn't yet have enough consumers using its MSN service to entice the needed advertisers.

A tie-up with Yahoo could address part of that problem. It has more than 100 million people visiting its site a month, making it the most popular Web site in the U.S. So far it is losing the race to Google when it comes to the technology for matching ads to consumer search queries, though it plans to unveil an upgrade to its system this month.

Combined, MSN and Yahoo would have all three pieces and, at least on paper, could leapfrog Google.

Behind the scenes at Microsoft there are two factions of thinking about a Yahoo deal, say people familiar with Microsoft.

One, largely led by MSN veterans, has been focused on Microsoft building its own answer to Google. So far that group has prevailed.

Pushing for more is Hank Vigil, a Microsoft senior vice president who internally is advocating for Microsoft to do a major deal such as a tie-up with Yahoo.
If a Microsoft/Yahoo partnership were to happen, I suspect it would be motivated more by frustration than anything. MSN management has been promising for years that they are "six months" away from catching Google, a window that seems to keep shifting forward.

While the article correctly argues that MSN's focus should be on internet advertising, mashing the MSN and Yahoo beasties together is unlikely to yield beautiful offspring. If the problem is increasing the number of websites carrying Microsoft's advertising, as the article suggests, I would think MSN would sign on many smaller players rather than becoming entangled with Yahoo.

This is not the first time Microsoft has considered a mega-merger like this. Eight months ago, MSN was in talks with AOL, talks that apparently included the possibility of merger. For more on that, see my previous post, "MSN and AOL, the kissing behemoths".

In any case, I do think we will see a frenzy of biz dev deals coming out of MSN. For example, Amazon recently switched to Microsoft for web search instead of Google, a deal that, as Danny Sullivan mentions, may include running MSN adCenter ads on websites. I am sure there is much more of this to come.

[WSJ article found via Danny Sullivan]

Update: Five months later, this idea of Microsoft acquiring Yahoo is coming up again.


Milo said...

Monopoly + Telecommunications = very bad.

I agree this is rather bad that one company have that much power over any industry. Luckily anyone with a computer has the potential to dethrone anyone else online.

Now you mention a merger would be a bad thing because of the complex nature of the organizations, but surely microsoft has a team fully versed in mergers and aquisitions.

What do you think of the potential downfalls of the merger are on the net population? Anything negative.

mb said...

It doesn't have to be an acquisition, but could be a joint venture similar to what Google and AOL worked out. Google contributed search, an advertiser network and a billion bucks in exchange for access to AOL users, AIM, and content.

Yahoo has traffic, advertisers, YPN, and decent search to exchange for Microsoft's cash and access to 90% of the world's desktops. They've already agreed to integrate IM, which would be tough to beat.

Seems like a pretty powerful combination even without a formal acquisition. Google should be worried, and had better be working on a deal with Amazon, though it looks like Microsoft may have sewn that one up already.