Friday, February 1, 2008

Why Microsoft Yahoo is not a Good Idea.

Some of you may have noticed the big news that Microsoft is trying to acquire Yahoo. Here is the Seattle Times story on this. I recently posted a comment on a NYTimes blog on this-

Microsoft has truly made an audacious bid in the online advertising space by approaching Yahoo. However, it is not clear if such a merger is a good idea.

Consider the following.

Google has a tremendous headstart in the online search and advertising business. Microsoft’s performance has been mediocre from the beginning. At this point, they are stuck in a no-win brand fight between MSN and Live. The best case scenario that they currently face is the success of and the demise of MSN.

Even while admitting that Yahoo has had problems in the last few months, the company has been ahead of Microsoft. By accepting Microsoft’s bid, Yahoo threatens to undermine everything that it has ever built. Moreover, the organizational cultures are so dramatically different, the resulting giant will spend months before it can truly compete.

Microsoft has forgotten how to innovate. That is the bigger issue. They cannot always buy their way out of problems. If they really want to fight in the online advertising space, they need to create a better search engine and advertising solution.

Microsoft-Yahoo will be a marriage of a mediocre search engine with a decent one. That is no way to beat a great search engine!

The argument that scale can drive down advertising prices is not a good one as well. Why? Advertising prices are determined by a bidding process among advertisers and by keyword demand. Simply having more media does not solve anything.

Steve Ballmer is clearly trying to save his legacy with this move. In the process, he might sink the company by creating an extraordinary large organization with few synergies. Paradoxically, in the end, the winner might be Google!