Internet Outsider

Microsoft Hallucinating? Or Planning to Buy Yahoo?

I'm going to go out on a limb here and assume that Microsoft division president Kevin Johnson is not a moron. So I'm also going to assume that, when Johnson said yesterday that Microsoft plans to grow its search share from 10% to 30% and its online ad share from 6%, he could not possibly be imagining that Microsoft could do this on its own.

So how could Microsoft actually achieve those goals?

Answer? (And there's only one). Buy Yahoo.

Buying Yahoo would give Microsoft 30% search share instantly. It would also boost Microsoft's ad share close to that 40% goal.

I continue to think that a Microsoft acquisition of Yahoo would be disastrous for Yahoo (not to mention creating an annoying one-time tax hit for us long-term Yahoo shareholders). But what such an acquisition would do to Yahoo is irrelevant. If Microsoft comes in with a Murdoch-like offer, Yahoo won't be able to refuse.
 
See Also:
Microsoft's MSN: Still Sucking Wind After All These Years
SAI's Microsoft Online Key Data Spreadsheet

The Great Advertising Share Shift: Google Sucks Life Out Of Old Media

[From Silicon Alley Insider] Everyone talks about advertising dollars shifting online, but when you're fighting all day in the trenches it's tough to get a handle on what this really means.  Here's what it means:

US advertising revenue at 4 big online media companies--Google (GOOG), Yahoo (YHOO), AOL (TWX), and MSN (MSFT)--grew by $1.3 billion in Q2, or 42%. 

US advertising revenue at 15 big television, newspaper, magazine, radio, and outdoor companies (Time Warner, Viacom, CBS, etc.) shrank by $280 million in Q2, or 3%.

Put differently, U.S. advertising revenue at all 19 companies increased 8% year over year in Q2, to $13.8 billion ($55 billion annualized).  The online portion of this pie grew from $3 billion to $4.2 billion (23% share to 30% share).  The offline portion, meanwhile, shrank from $9.9 billion to $9.6 billion (77% share to 70% share).  The online companies, in other words, picked up 7 percentage points of market share in a single year.

Other fun facts:

Within our company set, the only traditional media business that grew U.S. advertising year-over-year in Q2 was Outdoor (up 13%). Meanwhile:

• Television (cable and broadcast) shrank 1%, or $50 million
• Print (magazines and newspapers) shrank 5%, or $170 million
• Radio (terrestrial) shrank 7%, or $105 million

Obvious Conclusions

Traditional media executives--especially in the newspaper business--often blame their current woes on "the real estate market" or "cyclical weakness."   Economic weakness may be exaggerating the downturn, but it's not the real problem.  Whatever weakness is hitting the newspapers is also hitting Google.

Media power is not only shifting by medium (the handful of Internet companies are collectively valued more highly than most of their traditional media brethren combined), but by geography. Most "big media" companies are still headquartered in New York. Most media power, however, is now headquartered in California.

These trends are secular, not cyclical: TV networks, radio networks, and newspaper companies won't suddenly wake up one morning and find themselves back in charge.  Individual Internet companies may screw up (see Yahoo/AOL), but if they do, others will rise to take their place (Google).

Traditional media executives are doing a superb job of milking cash flow out of shrinking businesses, but you can't save your way to prosperity.  The smartest companies acknowledge this and are 1) returning cash flow to shareholders, 2) diversifying via M&A (as the Washington Post has done), and/or investing in or buying promising interactive businesses.

Details

We looked at US advertising revenue for 19 companies: Google, Yahoo, AOL, Microsoft, Time Warner, Viacom, CBS, News Corp., CBS Radio, Citadel, Disney, Entercom, Clear Channel, Clear Channel Outdoor, Time Inc., New York Times Company, McClatchy, Dow Jones, and Gannett.  We divided the companies into the following sectors: Online, Television, Print, Radio, and Outdoor.  Please see detailed data, analyses, and notes here.

Facebook Puts Self Up For Sale: $10 Billion

[From Silicon Alley Insider]. Few seem to have noticed, but Facebook has now officially put itself in play.  Peter Thiel, a Facebook investor and director, granted a detailed interview to The Deal last week in which he rejected several lowball offers that have reportedly come over the transom--$3 billion range--and essentially offered to sell the company for $7-$10 billion.  The announcement would not have been any more direct if Facebook had written an open letter to Google saying: "Dear Eric: $10 billion and we're yours."

Yes, of course, Thiel also threw in all the required noises about how Facebook has no interest in selling, no interest in going public, etc., to make sure that when Google does walk in the door, it will be the Google folks who are selling.  He also explained why Facebook wasn't ready to sell (not developed enough) and why those who gripe about Facebook's low revenue are missing the point (we don't care about revenue yet).  But make no mistake: Any time a company is this specific about what it would take to get it to the table, it's for sale.  What's more, it's probably for sale at the low end of Thiel's $7-$10 billion range.

As a last gesture of helpfulness, Thiel was also kind enough to tell everyone how much revenue Facebook will generate this year--$150 million (so assume at least $200 million--have to set the bar low)--of which half comes from the Microsoft deal.  So, there, Google and Microsoft investment bankers, you now have everything you need.

Let's see, at today's Google stock price of $515, a $10 billion Facebook buy would amount to about 6% -7% dilution.  A veritable tuck-in!  And none of the copyright headaches that came along with the $1.7 billion YouTube acquisition.  Microsoft?  Why, you'll generate $10 billion in cash in the next few months.  So, step right up!  Yahoo? Um, sorry, missed your chance last year when you could have had it for $2 billion. David Shabelman, The Deal.  DealBook, NYT

Rumor of the Day: Microsoft for Facebook for $6 Billion

No, of course we can't confirm it.  But it makes sense, don't you think?  Steve Ballmer, desperate and furious, sick of sucking wind in the Internet game, sick of losing every Internet in-play company and much of the future to You Know Who, sick of feeling like a has-been also-ran, raiding the bank account and snapping up the hottest company on earth.

The fly in the ointment: $6 billion's a nice fat number, but it's only 1/25th of Google's valuation, and the Facebook folks clearly think they're worth more than that.  So maybe Steve will have to throw in another $5 or $10.  Or $20.  Or maybe Mark Zuckerberg will just tell him to go...home.

TiVo Provides the Missing Movie-Download Link; Threatens Cable Cos

At long last, someone has finally addressed the gaping hole in the digital-movie-downloading business. TiVo's new deal to let subscribers rent or buy Amazon.com digital movies directly from their TiVo boxes removes an awkward step in the process: customers no longer have to futz with their computers to rent or purchase a movie. Now, they can just pick up the TiVo remote.

Perhaps this will finally light a fire under the cable companies, whose resistance to unforced innovation is legendary--and whose grasp on the digital rental market continues to slip. Or perhaps it won't...

Cable giants like Time Warner Cable, Cablevision and Comcast have been trying for years to boost revenue with on-demand movie rentals. But success has been hindered by limited movie selection, short viewing windows, and the inability to for viewers to purchase downloaded movies outright.

Meanwhile, online movie services like Amazon's Unbox or Apple's iTunes have required a computer to make the transaction and download the movie file. Getting the movies to play on TV has been even more complicated and expensive, requiring either a complex computer setup or a pricey gadget like Apple TV. TiVo's deal with Amazon solves some of these problems, allowing subscribers to buy movies without leaving the couch, or rent them for 30 days, often for less money than 24-hour cable rentals.

But don't short cable yet: TiVo's impact is limited by its modest presence -- only 4.3 million total subscribers, of which only a small percentage have set-top boxes compatible with the new service. Also cheap, no-brand DVRs built into cable boxes have already reduced TiVo's market share, and now that TiVo has blazed the trail, the cable companies are presumably free to strike similar deals of their own. Because digital-download services require a high-speed Internet connection, moreover, even the TiVo box is not a total loss for the cable companies.

In any case, expect more deals like this in the near future from companies like Apple, Microsoft and Sony, all of which are eager for a place in your living room -- at your cable company's expense.

Map Wars: Google and Microsoft Tussle Over Coolest Map Apps

At the Where 2.0 conference in San Jose--which, like every other web-related conference these days, is jammed.  "Geospatial" content and tool companies have developed into their own micro-economy, and Where is the center of it.

The big fight, here as elsewhere, is between Google and Microsoft, over who can produce the coolest 2D and 3D global mapping platforms.  The startling news is that, in this arena, Microsoft appears to be holding its own.  Google's new "block view" feature is cool (put yourself on map, look at buildings around you, walk down street, etc.), but Microsoft's new "Virtual Earth" project is even cooler.  The latter is powered by high-res photos taken from low-flying planes, and the reported $150 million the company is spending on geospatial content is paying off (at least in the "wow" department). 

As with many of the companies here, Google Earth and "Virtual Earth" appear to be cooler than they are commercial, at least for now.  The most obvious source of revenue on the consumer side of the geospatial business would seem to be local advertising and logo/placement, but if this opportunity is producing meaningful numbers, no one is discussing them.  The CEO of Platial, for example, Di-Ann Eisnor, raved about how much money there was to be made in made in mash-ups, but offered exactly zero details.  The same went for a company that provides "soundscapes" (click on a place, listen to what it sounds like) and Garmin, which has some cool "make your own trail maps with your GPS device" technology that mountain-bikers and joggers are reportedly bananas about. Garmin's model is obvious--sell units--but the gravy train that will eventually have to support the rest of this exploding industry is still unclear.

Instant Gratification: Microsoft Buys aQuantive

Always nice to make a good call, and Jason Jones made a great one yesterday--that aQuantive would be one of the next digital advertising companies to go in the panicked land-grab of the web elephants.  Even Jason probably didn't imagine that he'd be so right so soon, but we're proud of him.

Sick of forever being outbid and then having to mumble about "expensive" amid the Google-Yahoo celebrations, Microsoft made a preemptive offer on this one.  At 2% of Microsoft's market value, the acquisition is still a tuck-in, but it's the biggest one in Microsoft's history.  aQuantive won't solve all of Microsoft's web problems, but it will solve some of them.  Most importantly, it will mean that Microsoft's web business must--at least temporarily--be taken seriously again.   

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.   

Implication of Flattening Keyword Prices

Jason Jones:  Fathom Online reports that year-over-year growth in U.S. keyword prices remains in mid-single digits.  This means that Google, Yahoo, et al, are losing a growth-driver and must grow their paid search businesses through international expansion, breadth of keyword buys, and market share gains.  The flattening of keyword prices explains both the tepid growth of all search players except Google, and the recent pick up in M&A interest in the branded-advertising business.

Where will advertisers shift their focus as ROI's begin to stabilize in the paid search business?  Probably to contextual & behavioral advertising.

          Price    q/q    y/y
1Q07    1.46    -3%   5%
4Q06    1.51    2%     6%
3Q06    1.48    17%   3%
2Q06    1.27    -9%   
1Q06    1.39    -3%   
4Q05    1.43    -1%   
3Q05    1.44 

Peter Hershberg of Reprise Media responds (Text adapted from comment below and from this Jan 2006 piece on Reprise's site): 

[FROM COMMENT]: The fact that people continue to reference Fathom's KPI is mind-blowing to me...  While it is *possible* that keyword prices are stabilizing, there's no way anyone outside of the search engines themselves know with any degree of certainty.  Along those lines, it's worth noting that in January of 2006, Fathom's KPI suggested that keyword prices for 2005 had fallen by 16%. Google's stock more than doubled over that time period...

[FROM JAN 2006]: Fathom's sample size of 500 keywords is not representative of the entire universe of advertising opportunities available on Google. There are literally millions of unique keywords being purchased in the search marketplace today. Furthermore, the KPI doesn't include either proper or brand names -- keywords that typically deliver significant volume at higher average CPC's. (In fairness to Fathom, they acknowledge this shortcoming in each of their reports. Whether or not the press picks up on it is another story...)

Second, and more importantly, Google's stock continues to rise because it's CPC's simply ARE NOT falling. And even if they were, there would be no way for Fathom, or anyone else, to know that was the case.

How can I be so sure? Because of Google's "Quality Score," a topic I've written about on several occasions in the past.

For anyone not familiar with this concept, Google defines Quality Score as "the basis for measuring the quality of your keyword and determining your minimum bid. Quality Score is determined by your keyword's clickthrough rate (CTR), relevance of your ad text, historical keyword performance, the quality of your ad's landing page, and other relevancy factors."

This essentially means that two (or more) advertisers could be required to bid completely different CPC's to occupy the same position against the same keyword. In other words, the advertiser with the "better" Quality Score might have to pay just $.10/click for the top position against the keyword "wireless accessories," while an advertiser that's been penalized for poor ad copy, a landing page that's light on content, or some other "violation" would be required to pay $.50/click for the same position.

      

Microsoft To Buy (Swallow) Yahoo...Again? Please, God, No.

Henry Blodget: The New York Post reports that Microsoft is urgently trying to buy Yahoo again, in part because it's sick of losing deals to Google (and, no doubt, sick of losing to Google, and Yahoo, and AOL, et al...).

Would it be a smart strategic move for Microsoft and Yahoo to combine forces?  Absolutely.  Is the best way to do this to have Microsoft suck Yahoo into the massive Windows/Office borg?  Absolutely not.  If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company.  If it doesn't, both Yahoo and MSN will die.

With all due respect to the amazing talent and resources at Microsoft, no company can do everything.  Microsoft is now so massive and broad that it is competing with IBM and Oracle on one end, and Sony, Apple, Google, and Yahoo on the other.  All of these businesses are complex and tough, and focus is a major advantage. 

In the past 12 years, despite its enormous talent, power, and desktop/browser monopoly, Microsoft has done no better than become an Internet also-ran.  Why?  In part because of internal politics: In Redmond, the Internet business will always be second-fiddle to the Windows/Office cash machine--especially when the Internet business may increasingly compete with the Windows/Office cash machine.  In part because of talent: Why would the best Internet talent want to work in a small division of a massive company, kowtow to Windows/Office kingpins, and get paid in stagnant Microsoft options, when he or she could become a billionaire at the next Google?  By the way, Microsoft is not unique or flawed here: It is for these reasons (and others) that few, if any, dominant industry leaders in one technology wave have also dominated the next one.

If Microsoft spun out Yahoo-MSN, the company would be able to recruit the best talent, run it's own show, and, if necessary, compete with Microsoft (which it would never be able to do freely as a division--this is the primary reason an outright acquisition would be a disaster).  The company could have an exclusive technology deal with Microsoft and get first crack at all partnerships.  Most importantly, existing Microsoft and Yahoo shareholders would benefit from all the upside--because they would be the combined company's single largest shareholders.

The only folks who would get hosed in such a deal, in fact, would be existing Yahoo shareholders, who would get socked with a cap-gains tax bill.  This is why a better plan would be for Microsoft to just swap MSN and a few billion dollars for a major (but not majority) stake in Yahoo. 

Alas, this sensible solution seems unlikely...because ego will get in the way.