Why, Oh Why is Microsoft Buying Yahoo?

I wrote an article in May of this past year about the rumored purchase of Yahoo (YHOO) by Microsoft (MSFT). Well, it looks like it is happening. The article is as pertinent today as it was nearly nine months ago. In fact, the landscape has change even further.

Here is what I wrote in May of 2007.

MSFT Buying YHOO? Maybe

4 05 2007 The rumors are flying… Again. If you follow the market, or the search space, you have heard this one before. I own shares in YHOO and because of that, I think that it is a great idea. On the business side? I am not inspired.

I don’t think that consolidation is needed in this space. At least not at this level. I am still a big fan of Yahoo Search Marketing (formerly Overture).

For people doing SEM and PPC (one in the same in most views) MSN coming along was something that was cheered by most. Finally another player who is significant enough to gain distribution and allow us another market to compete in. Well, it didn’t exactly turn out that way. When MSN Adcenter was finally live, I was very excited. With the reach of MSN through the various properties, I felt certain that they could challenge Yahoo for the number 2 spot in the PPC world. Not the case. In fact, it has been rather disappointing. You can achieve some nice results with Adcenter advertising, but the scale just isn’t there.

Well, what does Microsoft do? What does Yahoo do? Does a marriage make sense?

For shareholders in Yahoo (YHOO) this does make sense. For users… we shall see. I picture a post acquisition Yahoo with many of their parts being shut down.

What I think of most when I think of this possible combination is “what a free email behemoth this is�?.

Obviously many things have changed since then. The reasons for the acquisition are likely different than they were last year. Last year it was all about Pay Per Click (PPC) and gaining back some of the pie that Google has in the online advertising arena. Of course, this was prior to the level of challenge that MSFT is facing against its cash cow products, the Windows operating system (OS) and their Office Suite.

  • Facebook wants to become a ‘platform’ rather than just a social networking web site; many others have followed that lead.
  • Sun appears to be gaining traction with Open Office.
  • Google Docs are picking up steam and will soon be ready for use offline via Google gears.

Yahoo offers up some interesting technology and a massive user base. The cost for the acquisition probably made the deal that wasn’t right last year a much better one this year. Take an example that might resonate with you. You looked at a house last year in Souther California. It was priced at $700k and mortgage rates were 6.25%. Well, the market has cooled and interest rates are down. The house is now at $525k and the mortgage rates are around 5%. Wouldn’t you be tempted? Prices are down and money is cheap… Isn’t that the time to be a buyer?

This is an example of Microsoft saying the game is on Google (goog), Sun (java), Facebook, etc. Those three might retort “um…. we have been playing hard for a while now, where have you been”. In making that argument you have to look back at what Microsoft did when it threw down the gauntlet in the browser wars. Bye-Bye Netscape. If they can have the same kind of success by utilizing their monopoly in operating systems leveraging their user base, then the balance could shift.

I just don’t see that happening. It is like trying to turn around a ship in the water.

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