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.
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.