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Should Microsoft Buy Yahoo?

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Bruce Eckel

Posts: 874
Nickname: beckel
Registered: Jun, 2003

Should Microsoft Buy Yahoo? (View in Weblogs)
Posted: Feb 4, 2008 1:46 PM
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Summary
I read somewhere that over half of acquisitions fail. I think the percentage might be much higher than half.
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I have certainly seen acquisitions that looked like obvious bad moves, and later turned out to be just that. But the corporate leaders had managed to talk themselves into thinking it was a good idea.

Part of the problem is that a publicly-held corporation must put its cash to work, or, I suppose, pay it out as dividends. Buying small, innovative companies that have developed something that the corporation hasn't been able to -- that makes sense. Google, in fact, has turned this into a business model for small companies who develop an idea precisely so that Google might buy them.

Buying big, established companies -- those who are themselves capable of buying other companies -- seems to be where most of the bad ideas come from. Here are three that I personally paid attention to.

Borland buys Ashton-Tate

Ashton-Tate invented the DBase database system and was very popular for awhile, then began sliding. Borland developed a much-improved clone of DBase and was doing very well with it, gaining customers left and right from Ashton-Tate. Ashton-Tate continued sliding, and everyone could see it was only a matter of time before they went on life support. All Borland had to do was continue on their current path and they'd win.

Instead, they bought Ashton-Tate for a billion dollars. They threw away a billion dollars on a failed company when they were going to get all their customers anyway. A few years later Borland really could have used that billion dollars. These days, Borland is in a different business altogether.

HP buys Compaq

Compaq had not done anything interesting or innovative for years. It was a failing company, even if it appeared to be only slowly declining. In the computer industry, it's "lead or fail."

What did HP think they were getting, and what did they think they could do with it? HP already made computers, at least somewhat better than Compaq did. Was the plan to manage Compaq back from the brink? I can never figure out what upper management is thinking when they make decisions like this, especially with all the history of all the other acquisitions that have failed. Perhaps they're thinking "this time it will be different."

One argument that always surprises me is "we're buying their market." Why not, I think, spend all that money on making your own product better. Then their market will just come over to you.

Perhaps buying a competitor is the act that shows that the "management Peter Principle" has been reached. All the tricks in the management bag have played out, and we can't manage ourselves into creating better products. So we fool ourselves into believing that we can "buy the market" since we can't create a better mousetrap.

Microsoft might buy Yahoo

I don't think Google is perfect, but I use their stuff. Yahoo is still making little innovations here and there -- typically under marketplace duress, rather than leading because they've come up with the next great thing. But the only time I go to Yahoo is for Yahoo Movies, to find out when and where movies are playing. Yahoo Finance is supposed to be pretty good, too.

Yahoo itself admits that we shouldn't expect a turnaround before 2009, and that sounds optimistic to me because one of the fundamental tenets of their turnaround strategy is to "open Yahoo's technology infrastructure to third-party programmers and publishers." Can this be done after the infrastructure of a company has been built? I doubt it. It's a bit like Microsoft trying to add "security" on top of Windows. Windows wasn't designed with networking and security in mind, and security in particular is not something that can be added as an afterthought. Security must be part of the fundamental architecture, not an optional add-on feature (see Unix for comparison).

Opening the technology infrastructure is only objective #3. Yahoo's first two objectives are to be a starting point for the most consumers on the Web and to make the company a top choice for marketers seeking to place ads on sites across the Web. Basically, to reverse the fortunes of Yahoo and Google. How likely is this to happen? For that matter, how could it happen? What is it that's going to make you go to Yahoo rather than Google when you want to search, or to place ads with Yahoo rather than with Google Adwords?

Here are two places where Yahoo could get the jump on Google, although I think Google is already working on both of these. First, charging for ads based on actual sales generated by the ads, rather than just click-throughs. Think about it. If you wanted to advertise something and you knew you'd only have to pay for the ad when the ad actually sold something, wouldn't you advertise a lot more? It would be completely risk-free. Yes, the cost of an ad-based sale would certainly be higher, but would that really make a difference if your choice was between selling something and not selling something? Personally, I think it would be a no-brainer.

The other thing that might bring me to Yahoo is the store system -- and I consider any changes in this area doubly unlikely because Yahoo already has an entrenched (and expensive) store system. Plus Google is apparently working towards what I'm about to describe.

What we need is a very easy way to know that a transaction has taken place, so it becomes trivial to program against the transaction-processing system. Right now it's far, far too hard. I tried it with Paypal, and that turned me off. The coupling is much too high. What I really want to do is know when a transaction has happened, and what that transaction is, and that's all. My program can then do whatever it needs to do without becoming entangled in the transaction-processing API. If this process becomes easy then it will cause a big increase in online transactions. If Yahoo did it before Google then I might try it. The downside is that it's going to cost me more because of Yahoo transaction fees, and with Google Checkout all I have to do is buy some adwords each month and I don't pay transaction fees. So I might change to Yahoo for awhile, but as soon as Google solves the problem and becomes the cheap solution then I'll probably just switch to Google.

And that's really the point. Maybe Yahoo has some fraction of the market now, and maybe they will recover in 2009, but right now they're kind of a failing company. What is a hostile takeover by Microsoft going to do for that?

Is Microsoft going to manage them back to health? It seems unlikely that the "maybe 2009" recovery will happen sooner after a hostile takeover.

And the really big question: Microsoft already has an Internet division: MSN. But they haven't been able to make that go anywhere. Yahoo made a good start at the beginning of the Web revolution, but then got stuck and faltered. Why on earth would combining the talents of Microsoft MSN and Yahoo produce anything other than more stumbling around in the dark? Which company would lead this recovery? At least Yahoo managed to make a strong start on the Web before driving into the weeds. But no, it would be the company that takes over, Microsoft, who brought us both MSN and Windows Vista.

How does combining a failing company (Yahoo) and a failed division of Microsoft (MSN) produce a successful division of Microsoft?

The one thing that the two companies have in common is the very thing that will make them both fail at this Web thing. They both believe that it's about centralization. The companies are built around that philosophy. Yahoo tried to create a central place where people would go on the Internet, which worked in the early wild-west days of the web -- Yahoo was the best thing out there for awhile -- and it's what caused Yahoo to slide as the Web became more decentralized. Yahoo's centralized services are no longer as good as their decentralized competitors. Now we have BBC for news, YouTube for video, etc. And Microsoft, of course, is the "Cathedral" in The Cathedral and the Bazaar.

One Trick Per Company

I think each company rises to prominence, and then becomes ossified, based on a single Trick that they can do that other companies can't. For awhile, this Trick keeps them out in front, nimbly anticipating anything the competition tries to do. Everyone in the company starts feeling like they've got it all figured out. Managers and vice-presidents are chosen based on their dedication to and ability to mimic the Trick.

By this time, the Trick has become the only acceptable way of thinking within the company, so business innovation has become impossible (but if the Trick is a good one, it can serve the company in its "stable" mode for a long time).

At this point, throughout management, people have set up fiefdoms based on their perception of the Trick (which is usually distorted) and will fight against any changes in the structure of the company, because it threatens the security of their fiefdom. The company plays into this -- the company needs a way to keep managers in line so it usually measures them by how well they believe in the Trick. At the same time, it can't quite let them think they are good enough at the Trick that they could leave the company and go off and do it themselves (ironically, those are the very people that would be the best managers for the company).

At this point the company has become ossified. They still believe in the mythology of their youth, but the world has changed around them, either implicitly or explicitly adapting to their Trick, so the Trick no longer works. The company can't believe that it doesn't, so it just repeats the trick with more force. One thing I haven't seen is a company that has been able to realize that it's old trick no longer works, and come up with a new one. The entire company is built upon belief in this single trick, and it resists mightily any change in that belief system.

Before the computer age, companies went through these phases so slowly that very few Tricks worked, so most companies of a certain type tended to look like each other, and it became easy to say that "this is the way business works." Computers are about speed, and Tricks that never had a chance in the old world could work spectacularly well. Thus we've seen, in a short time, many companies gain success based on their Trick, and just as quickly go through ossification and eventually fail. As the examples pile up it becomes harder to pretend they are special cases.

Here are the tricks of the companies we're interested in:

Microsoft: The Quick Move. Everyone knows the story. Microsoft bought MS-DOS from a little company and then turned around and sold it to IBM, cleverly keeping the rights. As time passes, they improve the product. The ideas always come from somewhere else (Office and .NET are two examples). First they get into the market, then over time they improve the product.

Yahoo: The Only Playground You'll Ever Need. When they started, there was no place to "go" on the Internet. Yahoo provided the best place (at the time) to "go", which was a great service, but then, instead of continuing to think in terms of serving the visitor, there was a subtle change: Yahoo wanted to keep the visitor within Yahoo. So the goal went from "service" to "control." This looked better to shareholders and to sellers than it did to visitors. And since there was no real fence to force visitors to stay at Yahoo, they began leaking away. But within Yahoo, the shift was so subtle that they don't realize what's happened.

Google: Free Services to Sell Ads. The reason this is deeply clever is that the money stream, which is where managers set up their fiefdoms, is completely decoupled from the products that attract and serve the consumers. Which means that the product-creation part of the company can remain un-ossified for a much longer time. Even as Google has become big, the products continue to be creative and customer-oriented, which suggests the lack of involvement by managers and marketing people.

On top of that, the business model -- the advertiser only pays for a click-through -- is so simple that there is less leverage in setting up a fiefdom, because there's much less possibility to abstract or obscure information, and thus less potential for power. The formulas behind the business model are controlled by technologists.

The one thing that will probably keep Google out in front no matter what Microsoft and Yahoo do is Google's freedom to create end-user services. Because Google's business model is in selling ads, everything else they do can be done in the name of the consumer. This minimizes the need for and influence of marketing people. Which is not to say that technologists always create great things, but it seems that whenever marketing people get involved, their motivations and perspectives tend to make things that much worse. Look at Microsoft Office. Even with Microsoft's vaunted "Usability Lab" they managed to come out with new versions of Office where they moved features around and basically hid them. Now, instead of being afraid that the next version of Office will be more broken and buggy than the one you're using, you're afraid that you will have to go up an entirely new learning curve.

Microsoft's goal is to own the desktop, and the desktop is slipping away from them. Yahoo's goal is to keep people at Yahoo, and people leave the moment they find a better site. Both of these goals are primarily designed to serve the shareholder.

Google has shareholders too, but those shareholders have been specifically told that revenue all comes from ads. "Pay no attention to all those products and services, they are only indirectly associated with revenue. Eyeballs, you know."

I certainly don't believe Google's approach is flawless. For one thing, I think Google has gotten far too mired in a single technology -- Javascript on the Browser -- even as Google themselves have demonstrated the implacable problems with that technology.

However, Google's Trick looks like it's going to work for awhile, far better than Microsoft's or Yahoo's. And the latter two companies seem to be fully in the throes of denial, as they repeatedly throw themselves against the wall, declaring "Trick ... works ... must ... try ... harder!"

Microsoft would be better off buying a rocket and boosting their 44 billion dollars into space. They would lose less money that way, because the 44 billion will just be the start of the costs. All the restructuring and busy work and vision statements (hey, for 3.75 million dollars I'll come up with your new vision statement!) and opportunity costs while everyone sticks to their guns and nothing changes will add a lot more to the cost. Ultimately they will discover that combining two failures will not produce a success.

As long as you're mindlessly flinging money around, why not do something truly bold? Take a tenth of what it would cost to buy Yahoo, or less: "only" a billion, and start a skunkworks project. Keep the management structure away from it, let it actually innovate something (note that declaring that you are "innovative" doesn't make you so; in the words of the Bard, "Methinks thou dost protest too much"). Keep the management structure very shallow and fiercely dedicated to supporting the project instead of building status. You probably need to get managers who've never worked at Microsoft.

Heck, it's only a fraction of what you're talking about throwing away on Yahoo -- why not create a few of these projects. Who knows what you might come up with? But if Microsoft buys Yahoo, it will only produce yet another case study for business-management textbooks on why takeovers usually fail.

Here's another take on what Microsoft should do instead with its 44 billion.


Berco Beute

Posts: 72
Nickname: berco
Registered: Jan, 2002

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 6:33 AM
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Thanks for your very insightful part about Google. I really think you hit the nail on its head.

I wholeheartedly support your 'skunkworks' idea, but the reality is that such initiatives seldom lift off from within companies that themselves are the opposite of a 'skunkwork' company. It's funny to see that compared to Microsoft and Yahoo Google really fosters this 'skunkwork' philosophy. In every announcement of a new product or API they stress the value it holds for developers. Google understands that it's the developers that can turn ideas into real products (and often have good ideas themselves!). Despite Steve Balmer shouting "Developers! Developers! Developers! Developers! Developers!" at a Microsoft conference it is the marketing department that calls the shots at both Yahoo and Microsoft. Richard Feynman once stressed the dangers of management running projects that are vital for an organisation (google it :)

Microsoft should just donate a billion (or so :) to the Python Software Foundation, it would at least be money very well spent.

Vincent O'Sullivan

Posts: 724
Nickname: vincent
Registered: Nov, 2002

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 9:31 AM
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> Microsoft would be better off buying a rocket and boosting their 44 billion dollars into space.

One thing to bear in mind is that no real cash would be involved in a Microsoft purchase of Yahoo. It would all be done by swapping equity and shares and arcane methods that only accountants understand.

> Keep the
> management structure very shallow and fiercely dedicated
> to supporting the project instead of building status.

A shallow management structure is one that has few promotion opportunities and managers that aren't looking to build their personal status are ones that, arguably, lack ambition. I'm not sure that combining the two is a good long term strategy.

Bruce Eckel

Posts: 874
Nickname: beckel
Registered: Jun, 2003

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 11:08 AM
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> A shallow management structure is one that has few
> promotion opportunities and managers that aren't looking
> to build their personal status are ones that, arguably,
> lack ambition. I'm not sure that combining the two is a
> good long term strategy.

I wasn't clear. I should have said "managers that want to build personal status through success of the project rather than jockeying for position on a hierarchy." Something like that.

Bruce Eckel

Posts: 874
Nickname: beckel
Registered: Jun, 2003

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 11:12 AM
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> I wholeheartedly support your 'skunkworks' idea, but the
> reality is that such initiatives seldom lift off from
> within companies that themselves are the opposite of a
> 'skunkwork' company.

Oh, for sure. You'd need someone to keep the skunkworks project from being infected by the "standard" management of the company.

I don't actually believe Microsoft could make it happen. It's too centralized and slow. It would just be a far better use of their time and money than Yahoo. Two failures aren't going to make a success. Instead of repeating the thing that failed but pushing a lot harder, why not try something different?

Chris Adamson

Posts: 4
Nickname: invalidnam
Registered: Jan, 2007

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 12:22 PM
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> I don't actually believe Microsoft could make it happen.
> It's too centralized and slow. It would just be a far
> better use of their time and money than Yahoo. Two
> failures aren't going to make a success. Instead of
> repeating the thing that failed but pushing a lot harder,
> why not try something different?

Looking at Microsoft's proposed buyout of Yahoo!, I find myself wondering it it actually would have been better for Microsoft to have been split up by the anti-trust suit (which was abandoned by the DoJ after the Clinton administration was replaced by the Bushies). The proposed ruling would have split it into two companies -- OS and everything else, I believe -- while some pointed out that it really was in three lines of business: OS, desktop applications, and internet. Instead of being able to coast on Windows' ubiquity and the Office cash cow, the MS internet division might have actually needed to innovate and fight for attention. As separate companies, the internet and desktop companies might have sought revenues on other platforms too. Instead, the company is bloated, confused, and going nowhere. Its stock is down significantly from late 90's highs and has been flat for most of this decade. The only technologically interesting stuff they do is outside of the computing realm (e.g., game consoles and automobile interfaces), and that might be their best growth prospects... something better suited to smaller, nimbler companies.

Buying Yahoo! seems like the example Bruce cites of HP buying Compaq, a pointless exercise which I remember someone describing as just HP management (specifically Carly Fiorina) resetting the shot clock while figuring out what they were really supposed to do next.

Dick Ford

Posts: 149
Nickname: roybatty
Registered: Sep, 2003

Re: Should Microsoft Buy Yahoo? Posted: Feb 5, 2008 2:06 PM
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If it happens, Yahoo could be a big showcase for Silverlight and beyond "web 2.0"

Kay Schluehr

Posts: 302
Nickname: schluehk
Registered: Jan, 2005

Re: Should Microsoft Buy Yahoo? Posted: Feb 6, 2008 3:48 AM
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> If it happens, Yahoo could be a big showcase for
> Silverlight and beyond "web 2.0"

Technologically Microsoft will clearly push RIA and the integration of web and desktop. But why do they need Yahoo for this?

Microsoft is jumping the shark just because they can't dominate a market segment that seems to be critical to them at the moment. Ironically this is exactly the most prominent Web 2.0 business model and neither Silverlight nor Yahoo suggest any transgression.

Florin Jurcovici

Posts: 66
Nickname: a0flj0
Registered: Feb, 2005

Re: Should Microsoft Buy Yahoo? Posted: Feb 6, 2008 7:56 AM
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> A shallow management structure is one that has few
> promotion opportunities and managers that aren't looking
> to build their personal status are ones that, arguably,
> lack ambition. I'm not sure that combining the two is a
> good long term strategy.

Excuse me, but this is BS. Lower management often has a technical background, and stays at the level of lower/mid management just to keep in touch with the tech world, and get a chance to code once in a while. Why do you think such ppl don't have ambitions? Only, their ambitions don't translate into "get as high up in the hierarchy as possible".

I'll concede that this type of manager is the typical manager not to be found in any big company, so MS would have to look outside its organisation. Also, probably nobody able to take on the task would be willing to do so, given MS's history-proven inability of keeping marketing separate from technology.

Vincent O'Sullivan

Posts: 724
Nickname: vincent
Registered: Nov, 2002

Re: Should Microsoft Buy Yahoo? Posted: Feb 7, 2008 9:38 AM
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> > Microsoft would be better off buying a rocket and
> boosting their 44 billion dollars into space.
>
> One thing to bear in mind is that no real cash would be
> involved in a Microsoft purchase of Yahoo. It would all
> be done by swapping equity and shares and arcane methods
> that only accountants understand.

OK, so I was wrong (unusual, I know, but it happens)...

http://www.pcpro.co.uk/news/162783/microsoft-forced-to-borrow-to-pay-for-yahoo.html

Bill Pyne

Posts: 165
Nickname: billpyne
Registered: Jan, 2007

Re: Should Microsoft Buy Yahoo? Posted: Feb 7, 2008 10:25 AM
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I'd really love to know what MS believes it can gain by giving up their reserves and a lot of stock - especially since it has diminished its reserves in the last few years buying back stock (~= $40B yikes). It makes no sense from either a technological or business perspective. Any gain seems strictly short term, perhaps a year of boosted revenues as a result of Yahoo's revenue stream being added, but little long term growth. I don't see any innovation in user experience coming out of it, which is what they need in order to bring "eyes" and attract ads.

The other aspect is the infrastructure of Yahoo. If it isn't all MS, then MS will want to brand them by swapping out non-MS software, possibly requiring hardware swaps as well.

I can only see it as a desperation move. MS came to market dominance by controlling the medium on which PC applications were built. Now that internet applications are coming into prominence it needs to control the medium (or compete on innovation - shudders) but hasn't been successful with MSN. The MS execs think, "Hmmm, our strategy for gaining market penetration when our own products don't work has always been to buy a market leader. Google is too big. Yahoo is more vulnerable."

This deal has lots of cost and little long term growth return. Does anyone else have a different take?

robert young

Posts: 361
Nickname: funbunny
Registered: Sep, 2003

Re: Should Microsoft Buy Yahoo? Posted: Feb 7, 2008 12:45 PM
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> I'd really love to know what MS believes it can gain by
> giving up their reserves and a lot of stock

The answer for M$ decisions is always: Control. BG lucked out with DOS/IBM, and seeks to return to the thrilling days of yesteryear (oh, wait, that was a Good Guy). Anyway, one need look at Yahoo!'s offerings for parts to which folks are currently locked-in (whether they know it or not). The only one that comes to mind is Yahoo! Groups. My database editor vendor uses it for Support. Unless he chooses to do it himself, or find an alternative, he (and his clients) are locked in. Whether M$ can turn that into $$$ is an open question. Whether has other types of service, and it's agreed that Search isn't one of them, ...?

Bill Pyne

Posts: 165
Nickname: billpyne
Registered: Jan, 2007

Re: Should Microsoft Buy Yahoo? Posted: Feb 7, 2008 1:45 PM
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> Control.

This is the only reason I find credible right now. Like you pointed out it's not clear what they think they can control to lock people in.

MS got away with lock in when they weren't on anyone's radar. (Getting the hardware vendors to agree to installing a copy of DOS on every PC was a stroke of negotiation genius.) However, everyone knows what they're going for now and MS must be aware of it. Ballmer must be a heck of a poker player to bluff this much. Essentially he comes to the table with nothing to offer users but expects people to pay MS.

Matt Gerrans

Posts: 1152
Nickname: matt
Registered: Feb, 2002

Re: Should Microsoft Buy Yahoo? Posted: Feb 8, 2008 8:08 PM
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> I can never figure out what upper management is thinking when they make decisions like this...

They're thinking, "if this deal goes through, I get the $50 million bonus that I put in as part of it."

Gregor Zeitlinger

Posts: 108
Nickname: gregor
Registered: Aug, 2005

It's not all about enterprise culture Posted: Feb 23, 2008 6:54 AM
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> I don't actually believe Microsoft could make it happen.
> It's too centralized and slow.
You are ignoring that Microsoft does make that happen actually. It's called Microsoft Research. They have pioneered the latest in OR mappers (LINQ) and they are also developing a next generation OS.

Maybe enterprise culture (which you call Trick) is only part of the equation.

You might also ask: Should Microsoft sacrifice revenue from Office and make them available online - to gain ad revenue?

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