Microsoft’s Yahoo Blunder

 The news of Microsoft’s 40 billion offer to buy Yahoo astounded me. (CNN) Almost in a daze I listened to it again and again on one media outlet after another. All reported the same story: Google is gobbling up the lucrative Internet advertising market and Microsoft wants a share. I’ve seen some bad business moves—Time Warner’s purchase of AOL for example. But this one tops the charts. Not only will it fail. It will fail spectacularly.

Microsoft has had a remarkably successful run selling software. I use this term rather loosely since much of the software it sold is operating system code. Selling “code” may be a better term. Excluding a few minor (and late) exceptions—such as the Xbox–Microsoft made its fortune selling code.

In the early days selling code worked well. In fact, it was the only model around and it still works well in niche markets. In the 80’s anything computer related was by modern standards a niche market. Microsoft focused on owning the largest of these niches and rode those markets to stardom. Microsoft still thinks in terms of owning software market space. Even worse, Microsoft seems to think that everyone else thinks that way too.

This is where Microsoft comes into direct ideological conflict with Yahoo and Google. Yahoo and Google do not sell software. They sell advertising. Yahoo and Google don’t act like software companies. They don’t think like software companies. Because—they aren’t software companies! They are advertising companies. Microsoft doesn’t understand the advertising business. Most people don’t. Although it’s a very simple business.

Definition: Advertising is the art of consistently drawing lots of attention.

That’s it. Find a way to consistently draw attention and you have created advertising space. If you don’t believe me—think about the Super Bowl. It is the king of advertising. Why? It gets LOTS of ATTENTION. World class sports and world class entertainment rolled up into one massive show available for—you guess it—FREE.

Google has been winning the war on Internet advertising war because it’s really good at getting lots of attention. In addition to providing the best search engine on earth Google has found another way to get lots of attention: Offer free software services. People flock to Google services by the millions. Google doesn’t really care about the “code markets” it’s poaching. It doesn’t even think in terms of “code markets”. Google is just looking for “cheap” attention—and it’s getting it. The fact they have eaten up some of Microsoft’s “code markets” is mostly an accidental byproduct of their business plan.

Yahoo is very similar to Google, just less successful. In order for Yahoo to regain momentum it must capture advertising space (i.e. get and hold attention) quickly. That will come in direct conflict with the existing Microsoft for-sale software model. Microsoft will never let Yahoo poach any of their “code markets” until those products are no longer producing significant revenue. By that time Google will have poached all the useful advertising space and moved on. A merge with Microsoft is the death-knell to Yahoo’s ability to compete with Google.

On the other side, Microsoft gains very littel from Yahoo.  An advertising company has very little in common with a niche software company. It can do nothing to defend it from Google. Microsoft may gain something in intelectual property and people, but certainly those things can be aquired much more cheaply from small startup firms. Ultimately, the main problem with the Yahoo acquisition is it will distract Microsoft from what it really should be doing—abandoning declining niches (like OS and Office Products) and moving into new niche space. The purchase of the ProClarity business intelligence suite was an excellent start down that road. Microsoft needs to build on those kind of small purchases.

I predict that if Microsoft goes through with the Yahoo purchase it will find itself caught between being yesterday’s niche software player and tomorrow’s advertising company and will fail at both.


Disclosure: I do not own any positions in either Microsoft, Yahoo or Google.


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4 Responses to “Microsoft’s Yahoo Blunder”

  1. Curt Monash Says:

    I think you’re greatly underestimating the possibilities for the merged entity. Please see for examples.


  2. Says:

    Thank You Very Much man …..

  3. Microsoft, Yahoo and Knowing Your Product « Outside of the Triangle Says:

    […] and Knowing Your Product Posted February 10, 2008 Jeff Staddon has commented in his post Microsoft’s Yahoo Blunder that Microsoft’s acquisition of Yahoo represents a poor investment. He points out that the […]

  4. Luke Randall Says:

    Contrary to what the top poster says, I believe you have nailed it spot on. Claims of synergy that will be realised in mergers are almost *never* realised, and on the contrary the cultural clashes of corporate structures, management styles, etc., generally drains a lot more from the companies than the synergies realised.

    As you say, Microsoft and Yahoo! are completely different companies, and unsubstantiated claims of synergy will do nothing to bring the unsuited partners to a happy union.

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