Microsoft's Bid on Yahoo

I have been having very interesting conversations with friends and colleagues over the last few days on Microsoft’s unsolicited takeover bid on Yahoo. Many among us believe that this was not a surprise at all – just a matter of when. We all know the cat is out of the bag. The 62% premium bid has been announced. Others argue that it smells a la Time Warner – AOL – does not make business sense and doomed for failure.

I believe it makes good business sense. And my reasoning is pretty much what Microsoft has laid it out – nothing ordinary. It is about time that they did something disruptive to compete with Google. Without a shade of doubt Google has been dominating the $8 billion paid search advertising space which is supposed to grow at 28% to $11 billion. That’s too big a pie for even the “blue monster” to ignore. Other internet players like Yahoo have so far been unsuccessful in challenging Google. Yahoo repeatedly missed opportunities that Google has grabbed. Whether it is with decent ad space monetizing models or with key acquisitions like Doubleclick. There seems to be another strategic element to why Microsoft is concerned. Google has been quite successful in expanding its application scope to create many more avenues to pump in advertisements. Take for example, Google aps. Not very popular as yet, and miles away from the power and sophistication of Microsoft Office functionalities, yet going forward, the fact that it is free and is accessible from anywhere (need internet connectivity) might attract people using these aps. Once it creeps into people’s usage, Microsoft will find it difficult to get users switch back to Microsoft products like Office. Who knows more than Microsoft on how easy it is to get people switch applications. Simply put – Microsoft may just quite end up on the wrong side of the table this time. It is prudent to think about an alternative business model and how to capture internet dollars.

So what are the key uncertainties or challenges that Microsoft should be looking at provided merger with go through. Here’s what I think.

1. Merging two very different organizations. 14,000 employees in Yahoo will be a part of the 80,000 existing Microsoft force. I am told by friends that the incentive structures are different, day to qay work culture is different. Yahoo, many believe, has a flavor of a startup while Microsoft is a large bureaucratic (in many ways). Will people like it? Well, right now – people are skeptical. Microsoft has to handle this carefully.
2. Cannibalizing its own business. If Microsoft uses the internet as an alternative platform for all the good things that it has been doing on top of Windows, it would be interesting to see to what extent and how soon they cannibalize their own businesses and cash cows and venturing into new technology before someone else starts doing so. (Skeptic econ friends of mine are smelling sunk cost fallacy here)
3. Getting more eye balls. As any e-business guru would say, “It is all about eye balls.” More eye balls translate to more ad revenues. So will Microsoft/Yahoo combine shift be able to divert people from using Google? Remains to be seen.

An aside: Nicholas Carr's article on Google in Strategy + Business is worth reading