Google, Microsoft, Yahoo as Ford, GM and Chrysler

Could Google, Microsoft and Yahoo be the equivalent of Ford, GM and Chrysler more than 60 years ago?

That thought provoking question was raised by Bernstein analyst Jeffrey Lindsay, who cooks up weekend missives designed to make you go hmmm. The argument is an interesting one. Lindsay notes that the downturn of 2001 to 2003 in Web advertising--AOL imploded and Yahoo fumbled--allowed Google to emerge. Instead of buying Google, the future search giant went public and owned the sector.

Fast forward a bit and MySpace, YouTube and Facebook had no shot at going public. Facebook had its IPO shot, but blew it. Lindsay says:

Will the current downturn provide the condition for the next Google to emerge – and if so where will it come from? The  problem  today  is  that  today's internet  players  have formidable cash  piles which  they  can use  to buy  up almost  anything.  The  venture  capital  players that  brought  the internet  sector  into  being  have  generally  less  cash  to  hand and are becoming increasingly interested in other sectors.

The parallel with the auto industry? Buick, Oldsmobile and Chevrolet were the high tech startups industry of the 1940s. They were gobbled up to become GM. I thought Lindsay was stretching a bit when I read through his research note. But then I pondered Yahoo, which has Flickr, Delicious, Rivals.com, Zimbra and a bunch of other properties in its collection. Are these properties really any different than the nameplates and brands that GM and Ford have?

Microsoft and Google are similar stories. Any company that may be a threat someday is gobbled up. In the last two years, Microsoft has made an acquisition every three weeks, according to a Wikipedia tally. Google has made an acquisition every five weeks over the last two years. And why are all of these acquisitions happening? Microsoft, Google and Yahoo all have too much dough that theoretically should be returned to shareholders.

Lindsay writes:

We think having massive cash reserves causes the internet companies to do the wrong thing.  Microsoft has operated  a  loss-making  online  services  division  now  for years.  Current projections suggest that the company's online activities may  lose  $1.5  billion  in  2009  –  just  to  keep  the option  open  for Microsoft  to  expand  its  online  activities  in the future.   The net effect of Microsoft  subsidizing  its  lossmaking online  activities  is  that  it  creates  problems  for  the other players – such as Yahoo! and AOL.  Having three Web 1.0 portals around in the current market ensures that there is overcapacity  in  display  advertising.   Nobody  at  the minute can  get  even halfway  decent  CPMs,  because  these  three players  are  supporting  three  large  sales  forces,  three  ad serving  platforms  and  are  cutting  each  other's  throat  on pricing.  Add to that the fact that all three are supporting one or  two network/exchanges each.   Each of  the  large  internet players owns  an  in-house  ad  exchange  network now.   This virtually  ensures  that  nobody  can  get  any  pricing  power  in display  and  that  the  premium  ad  display  business  is constantly  undermined  by  bargain  basement  pricing  on  the network/exchanges.

Lindsay says that Google is better than Microsoft and Yahoo but it's blowing money at a rapid clip on inefficient product development. The point: Companies with a ton of cash can be stupid. Would the eBay have acquired Skype if it had to raise funding from Wall Street?

Lindsay's argument continues:

While we would be among the first to agree with the general principles of Chandler's "Coming of Managerial Capitalism" that  consolidation  is  the  inevitable  corollary  of  increasing efficiency in almost all industries, we think the maturation of the  internet  sector  is  being  accelerated  by  the  large players with big cash piles. Quite simply the internet sector is getting old before its time because  several large players are buying up just about anything that looks interesting and the venture capital sector is much less active.  What makes things worse is that the large players are not doing much with these new technologies  and  innovative  management  teams  once  they take them inside. Nor is this necessarily a good situation for shareholders.  We would  further  argue  that  today's  internet  players  are increasingly  acting  like  yesterday's  media  conglomerates.  Arguably this has already been the downfall of AOL and has been a major factor in Yahoo!'s recent demise. The problem  with  the Web  1.0  portal model  is  that  they  all  copy  each other's strategies.

Examples of copycat "innovation" abound. AOL launches a photo site, Yahoo copies and then buys Flickr. MSN follows with a copycat. Google gets Picasa. There are four finance portals--AOL Finance, Yahoo Finance, Google Finance and MSN Finance. It's a similar situation for personals sites.  Are these sites really necessary?

The bright side:  A downturn is forcing these companies to cut back on spending. Google may not need those additional data centers. Microsoft and Yahoo still may become pals. AOL.com will eventually merge into another portal. However, there are no guarantees that these Internet giants won't continue to be dumb with their dollars. If the likes of Google, Yahoo and Microsoft continue on their current path they could be on a fast track to a Detroit-like future, argues Lindsay. He concludes:

To  our  grandparent's generation Detroit was the equivalent of Silicon Valley – we would  rather  the  internet  remained  a  source  of  innovation  and wealth for future generations.