Does Microsoft really need Yahoo? Pondering the opportunity costs

Does Microsoft really need Yahoo? Pondering the opportunity costs

Summary: The gloves are clearly off in the Microsoft-Yahoo hostile takeover saga. Microsoft threatens a proxy war.

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The gloves are clearly off in the Microsoft-Yahoo hostile takeover saga. Microsoft threatens a proxy war. Yahoo beefs up severance costs and creates an estimated $500 million in additional expenses for Microsoft if the software giant acquires the portal.

But in a research note today, RBC Capital Market analyst Robert Breza raised an interesting question: Does Microsoft really need Yahoo?

The answer thus far has been a resounding yes. Microsoft by its big premium of $31 a share, or $44.6 billion, its willingness to take on some debt and talk of how it needs to close the Google gap almost sounds desperate. And for now I'm on the Microsoft needs Yahoo bandwagon too--even though the deal is likely to be a disaster and proxy talk and board maneuvers can get messy (see Techmeme).

Perhaps that conventional wisdom needs to be challenged. Breza makes the following point: To Microsoft Yahoo is "less of a need than a want." Then analyst then makes the argument that Microsoft could close the Google gap without Yahoo, but at a slower pace.

Currently, Microsoft doesn't have the scale in their search advertising platform, and this lack of scale has slowed them from making the "killer app" that combines one platform for users to target search, display, in-game, mobile, voice, and video marketing. These are all previous investments that depend on SCALE to make any further platform integrations reasonable. Online advertisers are ingrained in Google and Yahoo! platforms. Getting advertisers to spend on the additional overhead for a platform that is a distant third place in terms of search is a difficult task (it's been difficult for Yahoo which is a distant second).

It's possible to argue that without YHOO and a blank check for $45B, Microsoft could make investments that would bring scale over time, and also more synergies beyond just advertising. Salesforce.com at 100% premium is $12B, Omniture at 100% premium is $3B; and that leaves $30B to acquire Facebook. It could be argued that adapting/integrating these platforms with adCenter would bring advertisers/scale to the markets these businesses already serve (business and gen-x-y-z).

Frankly the light bulb went on for me as soon as Breza brought Salesforce and Omniture into the equation. Wouldn't Salesforce.com be a better fit with Microsoft's core businesses? Wouldn't Omniture look swell in a business intelligence or advertising dashboard? Wouldn't those purchase make a lot more sense for Microsoft? I'm not entirely sold on Microsoft buying Facebook, but you get the general idea--the software giant could do more with its money without buying Yahoo.

The thing missing in the discussion about Microsoft's purchase of Yahoo is the simple concept of opportunity costs. What opportunities will Microsoft forgo as it tries to integrate Yahoo? Could Microsoft spend its billions on other acquisitions that make more sense?

It's something to ponder for sure. If Microsoft comes around on this line of thinking Yahoo's board may get its wish and remain independent--much to the chagrin of the portal's shareholders.

Topics: Microsoft, Browser, Enterprise Software, Legal, Social Enterprise

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41 comments
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  • How do you question genius?

    SteveB IS a genius. The man knows all. My rep took me to a very refined breakfast this morning where he handed me the latest SQL Server 2008 bits. I immediately handed the DVD to a courier and told him to tell my MCSEs to upgrade all SQL Server immediately, regardless of business impact. Then we moved to the Yahoo purchase. My rep said to ignore all of the media FUD around this purchase. Yahoo needs Microsoft. Yahoo is dead without Microsoft. Yahoo is not an innovator. He told me SteveB has a master plan and that Yahoo will just be the trojan horse to get Vista onto everyone's desktop. He then showed me an internal study performed by a neutral third party that is owned by a Microsoft partner praising the deal. With that, our eggs benedict arrived.
    Mike Cox
    • I think you say...

      "Please master, I don't understand why it's necessary to buy out Yahoo when MS could spend the $44 billion improving MSN". Real geniuses normally like answering questions from the curious.

      I do like the "neutral third party that is owned by a Microsoft partner". After all, if you don't control the analysts, who will?
      John L. Ries
  • After Yahoo swallows it poison pill...

    And it seems like they would rather do that than let MS have them, MS simply retracts its offer as they watch Yahoo go under.

    Then they can exercise plan B with one major player out of the way.
    bjbrock
    • Interseting thought

      Scare them out of existence.
      GuidingLight
    • Plan B?

      Plan B would be give Google (currently around 77%) the 12.23% share of the global marketplace (currently held by Yahoo)? Microsoft has a whopping 6.02% (as of last month), thus not being a great deal as per Web advertising. Even with Yahoo, they would only have 18.25% (which may be enough to make it profitable, but MSN and Live are not exactly great money makers for advertisers).
      B.O.F.H.
  • Search and sociability...

    ... are what sells advertising. Microsoft is buying consumers. How would these other services increase the number of people seeing ads? Microsoft is confident of being able to provide software.
    Anton Philidor
    • Nah...

      Problem is, they shouldn't be so confident of keeping "bought" consumers...many of us are outta there as soon as M$ fingers get on the YHOO pie. Tossing money down the drain if their main objective is to buy eyeballs.
      Techboy_z
      • similiarly, as soon as Google acquires anything, I look for altnernatives

        That is why I like Yahoo search, gives me good results, and want MS to stay away from Yahoo.
        killerbunny
        • I don't mind google

          At least with google I know that they want to send ads my way.. The more targeted the better, hence they like to know stuff about me. With microsoft, they want to not only know about me, but control me, control what I can do, control what I use, decide arbitrarily if my music selection is up to their standards, decide arbitrarily if I can watch a dvd on my pc, and so forth. Big difference.
          Calson
      • Well, that's one person...

        Knowing that Microsoft has purchased a company wouldn't drive away too many people. For one, in some years Microsoft is the best known and most approved brand in the world. ( ;-) ) For another, people who have established contacts through Yahoo would be inconvenienced if they switched.

        People can be driven away by failures, but "Microsoft bought Yahoo!" is almost certainly insufficient in itself.
        Anton Philidor
        • Certainly would drive away some

          There are a number of anti-MS talkbackers on this forum that have publicly stated that they would bail (as would I) and I suspect that even those without an opinion on MS
          John L. Ries
          • Hit the button too soon

            There are a number of anti-MS talkbackers on this forum that have publicly stated that they would bail (as would I) and I have to think that even those Yahoo users that are not necessarily anti-MS would consider leaving if either quality of service declines (due to technical difficulties arising from integration, or increased indebtedness) or the reasons why they went with Yahoo to begin with start disappearing (like I keep saying, if Yahoo users wanted MSN, they would have chosen MSN). How large a fraction of users would defect is hard to say and is heavily dependent on what MS would do with Yahoo once the buyout went through, but rest assured that it would be significantly larger than 0. At the very least, they would lose the anti-MS segment, which is substantial among the more technical users (including computer professionals).

            Now if Yahoo really wants to play hardball with MS, they should make it easy for their e-mail users to back up old messages locally (POP or IMAP, anyone?).
            John L. Ries
        • Wanna bet???

          "Knowing that Microsoft has purchased a company wouldn't drive away too many people."

          You have seen how many ABMers are on ZDNet alone!? Yet you doubt? C'mon...tens or even hundreds of thousands of users are done as soon as MSFT does the deal! Just *watch* the traffic numbers slide!
          Techboy_z
  • Not that I want M$ to go after anyone else either...

    ...but the point is *well* taken that many other acqui's are better fits than YHOO (which, I just don't see *at all*!!)
    Techboy_z
  • Yes, MS buying Yahoo still doesn't make sense.

    Personally, I still don't see what MS is getting for it's premium paid for Yahoo. As indicated in the story, that's a *lot* of money that could be well used elsewhere.

    While there is Yahoo services overlap with things MS already does, I only see redundancy as a result of the merger of these online properties -- not a scaler improvement.

    The people who chose Yahoo don't like LiveSearch, or MSN for that matter, and are most likely to bail if MS takes Yahoo over. Loss of customers equals loss of advertisers equals loss of revenue.

    So what, exactly, is MS buying?

    I would think that spending the money improving one's own online properties or expanding one's market by buying complementary -- as opposed to overlapping --- services would be preferable.

    Just my $0.02 USD

    Regards,
    Jon
    JonathonDoe
  • For those who foresee Yahoo's death...

    I would carefully watch what Ebay is doing to anger their base of sellers and store owners. You may see defections to Yahoo in retaliation thus giving a shot in the arm to Yahoo's livelihood. My wife does a great deal of selling on Ebay and has looked a Yahoo in the past but felt Ebay obviously had the better exposure. However, these new changes to whether sellers can leave feedback on buyers and the increased rates may send her over to Yahoo.
    MikeyTheUnderdog
  • Web 2.0 or 3.0 or whatever is overhyped

    The web is overhyped. Period.

    Even the facebook thing is starting to level off and people really don't want to know every mundane thing about what their friends are doing.

    Everything is now geared towards selling me something, like the endless commercials in the network TV movie -- which is why I go rent a DVD.

    Whether Yahoo is part of MS or not, no one will really care. The ads will simply get served from a different server. And just as I migrated from TV to Internet, I am increasingly migrating to paper books.
    croberts
  • I agree that there are other (better?) opportunities

    While it is very difficult to understand how Microsoft thinks this is a good move I also understand that we have no idea what their plans are or what they will do with Yahoo should they buy it. I have to believe they in fact have given it a lot of thought and made plans for the future. You can say a lot of things about Microsoft but being stupid is not one of them.

    Where I still see a huge disconnet is that Microsoft simply does not "get" the social side of the internet. They are steeped in the corporate culture, they serve the corporate customer, and all they do is directed to that end. This simply does not fit with the "social" side of the internet. Being honest, if someone had come to Microsoft a few years ago and said, "I want to make a web site where anyone can post a video for free and users can come to it for free" they would have been booted to the curb.

    Each and evry step Microsoft has made to move into the social side of the internet has been a "me too" move. Someone offered free email, MS did a "me too". Someone offeres free search, Microsoft sort of does a "me too". Just about every thing they have done on the social side is a "me too" effort and is consistently a day late and a dollar short.

    Their latest effort to buy a social site (Yahoo and its holdings) may well succeed, in fact I am certain they can do it, but when they do they will find themselves holding something they niether understand nor can make fit their view of "good business". As many of you know, I have "partnered" with Microsoft in a number of areas and work closely with many other people that do the same. I (we) have made many, many suggestions for product improvement over the years and in every case Microsoft has come back and said, Give us a "business case" where this would be used. The fact it may or may not be a great addition or feature had nothing to do with it, the only thing that mattered was if it served the corporate customer.

    I believe what we see here is Microsoft's (Steve Ballmer?) recognizing they have missed the boat on the social internet and in a knee jerk reaction decided to buy into the market. Will it work in the long term? I fear the answer is no and its going to be a very costly experiment to both Microsoft and to Yahoo.

    All in all I agree with the author, there are a number of better options to spend $44 Billion on...
    No_Ax_to_Grind
    • Advertising is revenue...

      ... facilitated by software. Microsoft must be interested; it's one of the few opportunities large enough to make a significant difference to the balance sheet.

      But to obtain that revenue Microsoft must have content, and the company has shown it's not an especially adroit content company. The company has hardly tried sociability, as you observe.

      Microsoft (now) buys software companies when a significant problem has been answered well. Why shouldn't Microsoft also buy a good content and sociability company?


      By the way, is it possible that when Microsoft asked you for a "business case", the company was asking how it could make money from doing what you suggest? That money could come from home users or organizations.

      I've read that employee ideas at Microsoft are evaluated based on their impact on profits. You might have been treated like one of the crew.
      Anton Philidor
      • Yes no, and maybe

        I agree that ads can bring in revenue, but that doesn't mean MS has the right mix in place to do it. Or to be more accurate, they don't have the required mind set.

        Many (most?) of the social sites are there for fun and if it can sell ads fine, but that isn't why they exist or where started. The founders of YouTube have been very hoenst about that and they never in a million years would have thought it would be worth billions, they did it to have fun.

        When I look at any Microsoft site it is clear that they have one purpose, generate profits to the bottom line. On sites where they claim to be about "community" like Connect I see them trying very hard to "steer" the community into something Microsoft wants, regardless of the communities wishes. XBox live is a great example. Users have asked for a lot of things but they weren't profit generators so they never happen.

        Don't get me wrong, Microsoft does what it does quite well, but the measure of a great company is in its ability to know and understand its strengths and weaknesses and NOT try to be all things to all people. Heck, I look at the salaries surgeons take home and would like to have their income, but it doesn't mean I can be a surgeon just because I want the income.
        No_Ax_to_Grind