Why Microsoft Can't Buy Yahoo and "Just Be GE"

In the wake of last week's Microsoft-for-Yahoo rumors (and desperate hopes from the likes of me that the rumored deal would fall through), readers questioned my theory that a Microsoft acquisition would kill both MSN and Yahoo.  I argued that Microsoft was already spread too thin, competing with Oracle/IBM on one side and Sony/Apple/Google/Time Warner on the other.  Pshaw, some readers said: Just look at GE.  GE sells jet engines, sitcoms, locomotives, and credit cards...so surely Microsoft can handle a few different flavors of software. Today, John Battelle has picked up the same theme.

Here's the difference between Microsoft and GE, at least as it pertains to the Internet.  One reason Microsoft has struggled for twelve years with its Internet business is that it has always managed the business with an eye to protecting and/or augmenting its core desktop monopoly.  Microsoft's competitors, meanwhile, have approached the Internet business with an eye to doing whatever is best for the Internet business, desktop monopoly be damned.  And now that it is clear that the Internet business is going to compete with the desktop business, Microsoft finds itself in an even stickier situation: How can it do what it needs to do to win in the Internet without hastening the demise (or at least slowing the growth of) the desktop cash cow?

GE can compete in dozens of different businesses because it is a true conglomerate: Each division is free to do whatever it needs to do to win (and the divisions also aren't that competitive with one another).  At Microsoft, meanwhile, all the sideline divisions exist to protect or augment the major businesses, and Microsoft's Internet team has to work within this system.  For Microsoft's Internet business to have a real chance to win, it has to be able to launch wholesale attacks on Microsoft's core business.  And it's hard to see that happening within the Redmond corporate structure as currently defined.

In short, the reason Microsoft can't "be GE" is that GE is a conglomerate and Microsoft isn't.  If Microsoft wants to become a conglomerate, fine, but this will require a wholesale DNA transplant.  And by the time it got one, the Internet opportunity (and dozens of others) would have long since passed it by.   

Comments

[Raj]

Think of Expedia which ran outside Microsoft's umbrella and became successful company on its own. Microsoft needs to spin of internet division in order to make it more successful.

[John]

Henry, I think you are wrong about this.

An MS/Yahoo tie up could allow Yahoo to focus on Web media, search and ad sales and allow MS to focus on "migrating" the segment of its users who want to use the web as the desktop. Let Yahoo do what they do best, drive eyeballs and ad sales and let MS do what they do best, extend the desktop monopoly through great Internet enabled applications.

MS can't be GE because they don't have the necessary leadership.

[King Troll]

More apropriate here.

Henry, some interesting info I have discovered this weekend.

As you know Google search was giving me about 70% of my traffic. Sales were very low. Yahoo was about 15-20% with low sales. i been paying about $150/day between the two recently.

I submitted my items to Google Product Search. Traffic was not as much as search but I got way more buyers for free.

Let's give some basic numbers. Google/Yahoo Search =
$200/Day. About $175 from Google.

Google Product Search. Additional $100/day for free.

Yahoo Product search is a fucking Gold mine bro. The Yahoo shopping site. They charge $.25 per click, but fuck bro I've been getting another $300 average per day from it. I am about to try out Shopzilla too.

Maybee Amazon when i get time.

[N. Venkatraman]

You make a very good point. There is a huge difference between a conglomerate like GE (that could leverage operating synergies across business units without worrying about overlap in end-users) and Microsoft (that has narrow set of products and high overlap within its customer base). In the academic world, we make a big deal of the difference between related diversification and unrelated diversification. Related diversifiers have to deal with the thorny issue of horizontal linkages across products and markets that in some cases may be positive and in other cases could be constraining. For example--could Sony Electronics have spearheaded the development of network Walkman in the beginning that could have cannibalized the music profits?

The acquisition makes sense if it is a means to separating the business units with minimal synergy. But as long as the core needs to be defended at the expense of periphery, there will always be tensions and the core wins in 9 of 10 cases. But again, the acquisition could create major problems of post-merger integration of processes and cultures; and those problems always lead to lowering of expected synergies.

I like to see carving out of complementary pieces into a joint venture (much like SonyEricsson or FujiXerox or MSNBC) than MSFT paying an acquisition premium to buy Yahoo as a complete entity. Governance of joint ventures is less problematic and could allow both companies to explore ways of maximizing their competencies over time instead of assuming that MSFT+Yahoo >> Google. I believe that equation is still not proven under varying assumptions.

It will be interesting to watch how this unfolds.

[Steve Morsa]

Nice analysis, Henry.

Just another confirmation that it's generally better to gore our own sacred cows...than it is to watch our competitors do it.

[sakthi]

I wonder how the corporate like Microsoft struggling for almost twelve years in a internet business.Acquisitions should be made to keep the Microsoft in the business But i believe rather merge with one of the top leader in the sector,Microsoft can try to make a deal with some established player who are in the fifth or sixth in the industry..I believe it'll make huge welcome change...
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