Microhoo, MicroAOL, and challenging Google

You have to be careful about the kinds of fish you put in your fish tank. If one is considerably bigger than the other fish, it has an annoying tendency to eat them.

Big companies buy smaller companies all the time (and sometimes, small companies somehow manage to buy much bigger companies due to flukes in market valuation, as was the case when AOL bought Time-Warner, a testament to Steve Case' instinct for market timing as well as cojones the size of Jupiter). However, I would prefer if companies I favor bought other companies who didn't seem to me like star athletes in their late-60s.

AOL, like Yahoo, has an ad network mysteriously named "Platform A" (AOL execs have clearly been taking naming tips from Ed Wood). Further, like Yahoo, Google has been running circles around that ad platform. Google might have started as "just" an ad platform for the Internet, but it has used that beachhead to reach into other ad markets. Google's growth in total ad market share is far ahead of even traditional media companies, increasing in 2007 three times as fast as runner-up News Corp. They may account for only 14.9% of the total ad market (in 2007, probably more today), but if their growth rate continues, that number will balloon quickly. This is all built on a base where they account for over 60% of Internet-related advertising.

This is clearly a "threat" if you are a company selling software in a realm where ads are an increasingly useful way to monetize product. If Google ends up controlling even more of the ad market, every dollar spent promoting and / or monetizing products will end up enriching a fierce competitor.

So, again, I do see a rationale in this sudden enthusiasm to buy the ad platform pieces of other companies in hopes of cobbling together something big enough to pose a real challenge to Google. I just wish Microsoft didn't have to buy a $43 billion mountain in order to acquire a handful of diamonds.

It would be ideal if Microsoft managed to acquire just Yahoo and AOLs ad platforms. Microsoft wouldn't have to distract itself with merging incompatible corporate cultures, they wouldn't be responsible for maintaining whole new product lines, and the could just get on with the business of building a combined product that is big enough to challenge Google (and, hopefully, plugging it into areas where they do have a lead, such as in the TV space).

That's not to say that Yahoo and AOL don't have useful assets outside of ad platforms. It would be interesting if Microsoft managed to acquire control of both Yahoo and AOL's IM properties. Again, though, how many battles does Microsoft want to fight? Microsoft hasn't been doing anything particularly exciting with its existing IM assets (at least with regard to consumer oriented Live Messenger;  Office Communicator is rather exciting, though it represents an incompatible business-oriented IM strand within the same company). Would the addition of Yahoo, AIM and ICQ change that?

It all comes down to execution. Can Microsoft find ways to use new assets effectively?

I do see merit in some aspects of a merger with AOL and Yahoo. I just see so much risk as well. It's hard for companies to leave money on the table. AT&T still has a legacy phone lease business that caters to seniors who never got the memo regarding their right to plug any phone they want into their phone jack. I would put AOLs dialup business in the same category. Microsoft would have to maintain that, if nothing else so as not to throw away free (albeit dwindling) money.

Distractions galore...and all for a handful of diamonds.