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November 07, 2005


Bruce Hamm

Henry, what assets are you assuming would be in this new entity? Is your concept based on Microsoft and AOL both contribute their communications, advertising, access and content assets? Why would Microsoft, who has just made it clear that advertising is a huge opportunity for the company, place such strategic assets outside of their control? This is a long-term game (with online advertising reveneus growing for the next 10-15 years), and the AOL deal appears to be a short-term play stuffed with complexities than would challenge even the most adept management team. More importantly, this all seems premised on the attractiveness of such an entity and success in the capital markets, would investors really want a piece of a 'hey we're #3 story (the Avis-1 approach)? And, you would know this well, if the executive team at an AOL-MSN is acting in its shareholder base's best interests, what precludes them long-term from just doing a rich deal with Google for the search portion of the concern? How do you walk the balance between broad shareholder interests and strategic shareholder concerns?

Henry Blodget

I still think there is a difference between software and services--a difference that Ray Ozzie seemed to acknowledge in yesterday's memo, when he suggested that Microsoft's services would be able to plug into Windows but would not be made a part of Windows. And that's where I think Microsoft's business should be separated.

Part of the trouble I have with Microsoft's current strategy is that I just can't envision a company so vast and broad that it can compete successfully with Oracle, SAP, Sun, and IBM on one end and Google, Yahoo!, Time Warner, News Corp, eBay, and telecom companies on the other. I think the web services business and the software business should be separate, with cooperation encouraged but not forced, and I don't think Microsoft's shareholders would lose from this (Microsoft EGOS would lose, but so it goes).

As for whether the capital markets would support a No. 3, yes--especially if the company had the strategic backing of big media and Microsoft. The market would not support it indefinitely--the company would have to deliver, of course--but there would certainly be interest. And more important than the capital markets, I think, would be Madison Avenue, which would embrace the company, if only as a means of undermining the Google near-monopoly.

What goes into the entity? All of AOL and all of MSN. Full stop.


MSN is an also-ran, AOL is a listing barge! Reality is, they just can't muscle this one around ala the browser race of yesteryear. Google is in the business of building better mousetraps. If they can build a better literary index then they will take away from Amazon, if they can build a better garage-sale index, then they will take away from eBay and similarly from the instant messengers and the VoIP services and the news portals and the list goes on.

The most telling example of what's awaiting Microsoft is how easy it was for Google to launch an assault on Hotmail and show that it can be done easier, faster and better. Best of all, it was just an experiment, a warning salvo across the bow, courtesy the Google Labs.

The biggest advantage that Google has over Microsoft and all other players for that matter, is the ease with which this company moves. No drumbeats, no strategy cookbooks, no infinite-delays, just a steady stream of fluid motion.

Borrowing a page from Apple's new-found paradigm and buying a next-frontier-platform-provider like say Nokia, makes a great deal more sense than getting in bed with AOL. Fighting a come-from-behind battle is getting old and tired, they need to create some magic and fast, otherwise they would be well advised to transform the company into an Income Trust. Maybe then, they might start coming back to life on the capital markets' radar screens.

Jack Miller

Thank you for the post. I think your ideas are as good as it gets for holding third place and third place will see large revenues as the internet grows into TV, phone, etc.

The question I would love to have answered is "Will the major content owners be able to control the way the content is ultimately distributed?" I am not ready to pay .99 cents for a TV rerun but it seems that there will be a lot of low or zero cost content available from thousands of sources; some of it will turn out to be excitingly good stuff. The dream of all on demand content is powerful. I expect subscription fees for "prime" shows and events. "Will the producers be able to keep the "prime" shows piping through the cable and phone companies or will Google have so many eyes searching that the producers would be foolish not to take the plunge and offer internet downloads to all comers for reasonable prices?

Matty Dread

You may be right about what Microsoft should do, but here's what they're trying to do.

They want to keep the newly rebranded "Windows Live" services--Web-based e-mail, Messenger, VoIP,nad so on. These services are defense: they need to ensure that GOOG and YHOO don't get so far ahead that they can suddenly present a threat to the crown jewels. But the talk of ad dollars is a distraction, sure, a nice new revenue stream, but one of many.

Then they'll spin the parts they couldn't care less about--the dial-up ISP and content businesses--off into a JV with AOL. Then sell the ads provided via adCenter to this new JV.

What does Time Warner get out of it? Hmm...good question. And probably why the negotiations are taking so long.

Anders Kargaard Jensen

Great insight Henry - I love reading your blog - fantastic input to my investment strategy! Thanks! Only I don't understand why you don't personnaly own shares or options in Google? Any specific reason?


I agree that as currently constituted Microsoft will not kill or significanly harm Google. However, I cannot agree that merging with AOL would worry Google either.

Upon reading your post, I visited for the first time in a long time. I see a zillion different business there. I see traffic reports. Weather. Searching. Shopping. Merging with AOL isn't the answer. Setting these mini-businesses loose with MSFT resources sounds better. If I were Google I would worry about a search only outfit with MSFT bucks but not MSFT baggage behind it.

Moving around the internet is so easy that portals with mediocre applets can't win against specialized "perfect for what I want" sites. So I search with Google. Price with NextTag. Check weather with So on.

Anyway, as a long time MSFT shareholder I hope they don't follow your plan. It offers just merger confusion to an already confused business model.

Set free and spin out is what MSFT needs to do with it web businesses.

Neal Lachman

I don't agree at all with you on what MSFT should do. I have tried to give a point by point response to the points you raised.
Reality Check: Google vs Microsoft (part 2)

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