What about the trust issues in the Microsoft/Yahoo bid?

Microsoft's proposed acquisition of Yahoo! raises many questions. High in the list will be discovering Microsoft plans for the merged development organizations. On the press call, Steve Ballmer, Microsoft's CEO was careful to point out the extent to which Microsoft 'respects' Yahoo!'s development efforts. The fact is that Yahoo! is already losing talent. Can Microsoft do much about this?

I asked fellow Irregular and Redmonk analyst James Governor for his take: "Microsoft is world class at marketing to its developers. It makes it ridiculously easy for them to build applications and it markets them hard. Yahoo! has not done a good job here so there's plenty of opportunity for Microsoft to get the best out of those resources." Tick one in the acquisition execution box. More interesting and perhaps a clue to the future comes from an email dated yesterday sent by Brian McAndrews SVP Microsoft Advertiser & Publisher Solutions to staff. This was his outlook for 2008:

While search has been the main driver of the blistering growth of online advertising in the past, at least partially because of the “last ad clicked” performance measurement standard (pioneered by Atlas in the late 90s), we do not believe this will necessarily be the case in the coming years. The current system for tracking ad conversions , while the best available for years, is not optimal because it gives all credit to that last ad seen or clicked – often a search engine – and not any credit to other ad units the consumer may have seen prior that helped influence the user to seek more information about the advertiser. Thus, Search has gotten more than its share of the credit, but that’s starting to change. We’ll be making significant inroads here in 2008 through our continuing ground-breaking work in the area of “conversion attribution,” a new Atlas technology offering that will do a better job of “giving credit where credit is due.”

That said, we’re not discounting the importance of Search as it continues to drive a lion’s share of digital advertising budgets. Our goal is to help advertisers and agencies make their Search campaigns as relevant, targeted and highly converting as possible. We’ve made great strides toward this end, and will continue to make deep investments in both our Live Search engine and Microsoft adCenter to improve the value of our Search offerings for customers.

This seems at odds with what was said on the press call where the executives were at pains to stress the importance of search based advertising, upon which much of Yahoo!'s business rests. It seems clear that Microsoft has two strategies. On the one hand, McAndrew's position hints at a more socially organized method of advertiser reward and as such represents a direct swipe at Google's search based model. Quite what this will mean for merged development teams is far from clear but Microsoft will have to navigate these waters very carefully to avoid internal conflict.

But they might have one thing going in their favor. Google's most recent results demonstrate that the search giant is far from immune to threat. It has so far failed in its social networking initiatives with MySpace. The combination of search and more socially organized advertiser reward in what would be a combined model looks compelling. I agree with James Governor who said: "If Microsoft has truly understood it is the via via community and not the last click then I think Microsoft has jumped into the future."

That will be attractive to developers who like to think they're inventing the next great thing. Google might hit back with a pre-emptive strike for Facebook but given Microsoft's existing $240 million investment which theoretically places a $15 billion price ticket on the company, it is hard to see how Google can acquire without being forced to significantly up the ante. If this is part of Microsoft's strategy then it is incredibly smart. Force Google to react at a time when it has been weakened and so create doubt for developers who might be tempted away. But what about the products and services Yahoo! already owns?

Yahoo!'s del.icio.us, Flickr, Upcoming and Pipes are popular services that will likely come under scrutiny in what executives at Microsoft are pitching as an advertising bid. While I would not expect most consumers to walk away from Flickr, the feeling among the Twittersphere is that if Microsoft succeeds, then there will be a level of defection. Luis Suarez, Tom Morris, Al Wood and Paul Walsh talked about moving their Flickr and del.icio.us accounts to alternative services. Veteran industry observer Ed Yourdon asked:

Wonder if they would leave Flickr alone or impose stuff on them.

Nigel James and Al Wood both think these products are not in Microsoft's DNA so that even if unintended, they'd likely let them languish. I'm less sure. Del.icio.us has had a private beta running for some time that promises to deliver a much enhanced user experience. Flickr remains wildly popular with many services built around it. Assuming the deal is consummated, they may represent relatively minor components in an enlarged Microsoft but the company would be foolish to let them wither.

Endnote: Dan Farber speaks of this as Microsoft's way of putting a brake on Google while Dana Gardner addresses the question of mutual failure on on-demand.

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