Yes to Yahoo-MSN, No to Microsoft-Buys-Yahoo

  After fumbling its opportunity to get in bed with AOL, Microsoft has one more way to gain the scale necessary to be a serious competitor to Google: Get in bed with Yahoo.  (I am extremely skeptical that the MSN-is-a-Microsoft-division strategy will ever work--a skepticism developed over 11 years of watching Microsoft make vow after vow only to peak in distant third place).

To be clear: Microsoft buying Yahoo would be a disaster--for both companies.  Yahoo would disappear inside the Microsoft beast, the talent would leave, the brand would get diluted, the focus would change, and the company would ultimately disintegrate.  MSN's biggest weakness has always been that it is merely a division, one designed to support the ongoing dominance of Microsoft's crown jewels (Windows/Office).  If Microsoft bought Yahoo, the latter, too, would become a subordinate division.

The smart play, described in today's WSJ's article, would be for Microsoft to give MSN to Yahoo! in exchange for a big equity stake in the combined company.  Yahoo-MSN (which should remain "Yahoo") would immediately have the combination of scale, media, and technology necessary to challenge the Google juggernaut, and if it was successful in doing so, Microsoft shareholders would benefit.  It is less clear that this move would be a positive for Yahoo, which means that Yahoo could probably extract a good price. 

Right now, given the egos involved (on display in the failed AOL negotiations), this seems a long-shot.  Microsoft has never experienced or admitted defeat on this scale, and selling the division would undoubtedly (and shortsightedly) be viewed as defeat.  Short of a Yahoo-MSN combo, Microsoft's other option, in my opinion, is to spin MSN out as a public company. 

Comments

[Still Inside]

Where does the WSJ get this reporting? "In talks"? It's a company of 80,000 employees, so I'm sure they talk about a lot of stuff at MSFT. Useful, actionable news consists of verified reports of material discussions (i.e. people talking about specific numbers). This is just just the WSJ blowing more smoke.

As for MSFT buying YHOO, or selling off the MSN division, they don't need to do that. I certainly expect MSFT to pull YHOO into their technology platform (along with everybody else in the industry besides GOOG). This is what MSFT is good at, and how they've won dozens of previous battles.

MSN was never a "technology platform" and hence it never went anywhere at MSFT. The new structure for the company and the new positioning for the product line changes all of that. They are not so much enhancing MSN as they are starting over and trying to leverage some current assets along the way. They also don't care about the money right now, so it might be a good idea to wait on buying those MSFT shares.

SI

[Anders Kargaard Jensen]

I think you are right Henry - the best thing for MS to do would be to let MSN be swallowed by Yahoo! in return for a big piece of Yahoo! It would give them scale although they would still lack severely to the amount of searches on Google, whoch is by far the most important area for revenue generation.

Another view is: Yahoo! is probably today capable of increasing revenue by double digits percentage wise if they replaced their own ads with a favourably Adsense deal with Google. I mean - they have already admitted that they won't overtake Google - why not work with them - and generate more money than through their ancient Overture technology. Or is hounour still at stake and they can't give into Google's overall dominance?

[Steve D]

Henry,

what's your view if Yahoo-eBay will become strategically stronger as a combined company or Yahoo-MSN? As I understand the only real assets of MSN are Hotmail and Messenger. Probably more than half of traffic to MSN is generated thanks to Hotmail alone. What does Yahoo gain by absorbing MSN? There is too much overlap between MSN and Yahoo and it will just become more of the same. It's true that Yahoo can gain preferential treatment when it comes to integrating web content into let's say Windows/Office/XBOX/IPTV, but Microsoft is already forced to open API to third party developers thanks to the antitrust ruling, so the consumer's choice is not as much effected by Microsoft’s tactics as before and the best brand and best quality are likely to win (Google and even Yahoo are good examples).

I think that instead of doing more of the same as in Yahoo-MSN case, there are really good synergistic and strategic opportunities if Yahoo and eBay combine:
http://www.internetoutsider.com/2006/04/ebays_new_pony_.html#comment-16525879

[Neal Lachman]

Look at what MS did with NBC.

I think a Joint Venture is an option, nothing more than that. But a JV would be bery powerful. It would keep both companies independent and reap the benefits of the combination.

[Jared Lansky]

Never going to happen.

[ZF]

If Microsoft gave MSN away, on favorable terms or not, it would then have to face an unpleasant question about what is it going to be when it grows up.

[Victor]

MSN is the most moribund division inside MS. Speak to any of the engineers there and you'll hear a story of very low morale and people defecting in droves to both Google and Yahoo (although mostly to Google, who have an office next door in Kirkland). They're in a losing position and they know it. I can't imagine MS getting back into the battle meaningfully unless they use their desktop leverage and their old anti-competitive practices. If they do, then welcome back to the game MS. If not, then give it up, you've lost horribly and theres no coming back

[TheShadow98005]

Crafts by Veronica Files Lawsuit Against Yahoo; Company Accuses Internet Search Engine of Fraud

http://biz.yahoo.com/ap/060503/yahoo_fraud.html?.v=2

[Timothy Anyasi]

What happens if the fellow with the idea to save either yahoo or msn, is not big enough to get the attention of Chairman/CEO of either firms. Please Advice!

[Tom]

Google shall not be defeated, they are the best and shall remain the best :)

http://www.arcon5.com

[Vinny Lingham]

I have an alternative view on this. I think that both companies are potentially on the track and are driven by internal politics around their business and the marketplaces their operate in. Google is a clearly a leader, so why not immitate and innovate? The biggest flaw in any sort of partnership is that they will have 2 different PPC systems, and this does mean that there will be a potential fallout in the integration of the two systems. To further complicate things, Yahoo is rolling out a yet untested platform (Project Panama) to take on Google.

My blog presents a nice summary of my thinking in this area:

http://www.vinnylingham.com/2006/05/clash-of-titans-fresh-perspective.html

[Neal Lachman]

Vinny, You've written an interesting article. Thanks.