Roundtable: Four experts dissect the Microsoft bid for Yahoo

Making the two cultures mesh

From some investors' perspective, technology geeks look alike, and Bill Gates and Jerry Yang may as well co-own a jazz club in San Francisco together. But from a veteran technologist's standpoint, no two companies could have more disparate cultures than Microsoft and Yahoo. To them, the difference is a massive gulf, black and white, Star Wars versus Star Trek.

"Look, when Yahoo took on Overture, look how long it took to integrate those two companies. Look how long it took to really move that thing forward," JupiterResearch's Michael Gartenberg pointed out. "This is monstrous. These are two very different corporate cultures that would have to find ways to mesh. And we're still very light on details. Who are the executives that are going to be involved? Who at Yahoo is going to stay and who is going to be shown the door? Lots of questions here going forward, and this is not, by definition, going to be a panacea and solve all of Yahoo's issues and all of Microsoft's issues by coming together.

"The real challenge starts the day after the ink dries on the contract," he went on. "The real question is how they [Microsoft] are going to monetize their whole inventory, and if they were able to do that, we wouldn't necessarily be seeing a deal like this."

"What do we know about Microsoft?" asked Jarvis Coffin rhetorically. "They are an intensely competitive organization. And in my experience, they are more used to being the dominant player, and clearly they have not been, online. And I don't think that sits well with their culture. So I think they tried to build it, and now they're going to buy it."

"This is really an acknowledgement that their [Microsoft's] first-party online services strategy was not working," Directions on Microsoft's Matt Rosoff remarked, "[and] was never going to get the kind of market share or the gains that would turn it into a big profit center or a $10 - 20 billion business along the lines of Windows and Office, which is what they want out of Internet advertising."

For Web advertisers to go with a service such as Google's or Yahoo's, they have to adopt software tools to track the efficiency of their campaigns. Each service uses a different set of tools, so it almost doesn't matter that the service with 60% of the market might have tools that aren't as innovative as the one with 20%, Rosoff pointed out. When there's a three-way split, the number three player typically loses out...and guess which one's the number three.

"I think in search, Microsoft is worried that Google's building a near-monopoly in search advertising," Rosoff said. "Because when you have a market that's split 60/20/10, advertisers might be prone to say, 'Eh, it's really not worth going for three tools to reach 20 and 10, we'll just go with enough for one."'

The two-way split isn't as bad, however, and Rosoff gave us some historical precedent for that. Years ago, Microsoft actually outsourced its search services online to Yahoo, which at the time, Rosoff said, wasn't really as bad a deal as Microsoft thought it was. "As soon as the market split into three, it actually had the perverse effect of increasing Google's market share at the expense of Yahoo," he pointed out.

"There are a lot of very hard decisions in the future over which of the services that overlap between Yahoo and Microsoft will survive, which ones will be killed, which ones will evolve into an eventual consolidated offering," mentioned Carmi Levy. "And it's significantly premature to even speculate on what those decisions will be, but it's clear that it makes absolutely no sense from a synergistic perspective for Microsoft to keep many of the parallel services going between both companies."

Will it ever end?

Of course, all this assumes that the entire matter doesn't get bogged down forever in regulatory matters. Microsoft said this morning it expects the entire deal to be completed during the second half of this year. It's not yet clear which planet that part of the statement was transmitted from.

"Let's not forget that between the [US] Dept. of Justice, the European Commission, these are all government and quasi-government entities that have previously gone head-to-head with Microsoft over antitrust, anti-competitive issues," Levy reminded us...painfully. "So this deal certainly opens the door to more action of this type in the future, and Microsoft's going to face some very hard questions, certainly much harder than those that have been levied at Google in recent years over issues such as privacy, confidentiality, and user information.

"This is one of the risks you run when you play at this level, when you try to bite off such a significant chunk of market share, as Microsoft is doing now," he continued. "Giants don't walk down Main Street without causing some casualties along the way, and this is what we're going to see here, and Microsoft is going to both inflict some pain as part of this move, and it's going to have some pain inflicted on it as part of this move, most likely at the hands of regulators on both sides of the ocean."

But suppose this actually doesn't go through at all. Will Microsoft still have won something, just in the trying?

"Absolutely, because then they will have positioned Yahoo as a weaker player than we believed even a week ago," Levy responded. "They have not painted Yahoo in the light of Weak Company Vulnerable to Being Acquired. That previously was not the case.

"What Microsoft has done, even though for the past couple of years it's taken some pretty serious knocks from the media about being a dinosaur and having its lunch eaten by Google, Microsoft's on a roll now," he went on. "Whatever happens with this deal, Microsoft wants to be seen as a player that is swinging for the fences, that is willing to take that chance, that is willing to strike out a few times along the way, before it manages to hit it out of the park."

"I think regulatory approval will be the big hurdle," remarked Matt Rosoff. "Integration could take years. Are the acquisitions of Great Plains and Navision really done? Yea, they've been consolidated under the 'Dynamics' brand, but there's still different lines of ERP software, and they don't necessarily operate the same way, and they don't have the same code base, and Microsoft is still trying to come up with this unified, single ERP platform. And those acquisitions were six and seven years ago.

"Will it ever be concluded? Heck, look at Visio," Rosoff reminded us. "Visio is still not sold as part of the Office suite, and there's still things that Visio does differently from other Office applications, and that acquisition was what? Ten, twelve years ago now? So will they ever be completely integrated? I don't think so."

So Rosoff advises that Microsoft, if it does acquire Yahoo, let it retain some measure of autonomy. "That's how they're going to keep Yahoo's traffic, and that's how they're going to keep advertisers happy," he said. "Now, they might want to move it to a single back-end ad platform, and maybe advertisers will appreciate that, maybe they won't. But if the eyeballs are there, the advertisers have to reach them. If they start cutting things willy-nilly, and making everything MSN, and revamping the Yahoo Mail interface, that's when you lose customers."

One of our experts, however, predicted that the culmination of this deal could produce for both Microsoft and the market at large...absolutely nothing.

"Two or three years from now, I think they [Microsoft] are going to ask, 'What in fact did we buy? We didn't buy world domination,"' remarked Burst Media's Jarvis Coffin.

"Yahoo is a phenomenal property, and indeed, it will make [Microsoft] bigger and it will make them richer, but no, I don't think it's going to make them more powerful. It will only assuage their cultural requirements that they play a dominant role in all of their businesses, and in this case, it will give them better alignment with the size and critical mass of Google, and they can feel better about themselves," he said. "But it isn't going to change, I think, this fabric of the marketplace or really what it is ultimately good at, from a media standpoint, and that happens to be very granular, because that's how people use it, and that's what people treasure about it. This transaction will do nothing to further the user experience online generally."