Yahoo Bid shows Microsoft on the Ropes

Ponca City, We Love You writes "One day after the announcement of Microsoft's plan to buy Yahoo, there is an interesting piece from the NY Times analyzing the reasons behind Microsoft's bid and proposing that the bid is a tacit, and difficult, admission that Microsoft did not get its online business right and that online losses continue to mount while Google makes billions in profit. Microsoft "finds itself in a battle where improving its search algorithms and online ad software is not going to be enough," writes the Times. With the Yahoo bid Microsoft is trying to buy a big enough share of the market to be a credible alternative to Google with online advertisers. "This shows just how worried Microsoft is by Google," says David B. Yoffie. "Microsoft has faced competitive threats before, but none with the size, strength, profitability and momentum of Google.""

Eh?

How can a company that can afford to pony up $44.6 bn possibly be described as being "on the ropes"?!

Re:Eh?

"How can a company that can afford to pony up $44.6 bn possibly be described as being "on the ropes"?!"

Here, let me fix that for you ...

"How can a company that feels it has to pony up $44.6 bn possibly be described as being anything but "on the ropes"?!"

... and its not an "all-cash" bid. 50% Microsoft stock. At least they aren't paying in

At least they're not offering to pay in Bush coins [blip.tv] ... yet!

Re:Eh?

Look at for example GEC/Marconi. It can happen.

People aren't buying Windows Vista and Office 2007 because they have Windows XP and Office 2003 that does the job just fine, and possibly better, and it costs nothing to continue using it. None of their other attempts to diversify - Zune, X Box, Windows Live etc have been very succesful, so there are problems ahead.

They aren't bankrupt yet, but they are taking action to try and avoid it while they still can.

Re:Eh?

Actually, I was helping my neighbour with their new computer the other day, and when I pointed out that you didn't need to pay $150 for Office 2007 Home&Student to write letters, they were very open to the idea of trying out OOo. I think they'll be very happy with it, mostly because they saved $150.

Re:Eh?

People aren't buying Windows Vista and Office 2007 because they have Windows XP and Office 2003 that does the job just fine, and possibly better, and it costs nothing to continue using it.

Please folks, RTFA. To quote:

[Last year] The Office division alone had quarterly revenue of $4.8 billion equal to Google and an astronomical $3.2 billion in operating profits. The Windows unit is even more profitable.

In fact, Microsoft's Q1 results last year were the best for seven years [guardian.co.uk]:

Microsoft stunned Wall Steet with its latest financial results, based on the success of Windows Vista, Office 2007 and the Halo 3 game. First quarter revenues jumped by 27% to $13.76 billion, and profits by 23% to $4.29 billion. Sales beat expectations by more than $1bn.

Microsoft dwarfs Google in both revenue and profit. It's just lost out in the online services market (where despite rising revenues it still makes a loss), and wants to catch up. To do so, it can afford to make investments nobody else can, such as buying out another huge company with a big (if not terribly profitable) portfolio of online services. Together, the "network effect" would make both much more profitable than they are operating seperately.

Re:Eh?

Let's google for the answer.

I think MS really SHOULD improve that ...

search algorithm ... it would certainly help make the "service" an actual service! Over the years I've watched as Microsoft has released meh product after meh product. Isn't that their real problem - when the vendor lock-in wears off, they have DAMN weak products.

I have never understood the popularity of Windows with consumers (beyond the obvious monopoly power they wield with personal computer manufacturers), I find their software mostly blech (frankly, anything NOT Word and Excel is just junk) and their online products and services NEVER work as advertised. NEVER.

If I were Microsoft, I'd try and refocus the company culture and align it with the interests of its customers and not ... well ... whatever hellish alliance of businessmen, content producers and bean counters they're currently serving.

I think the XBox 360 points the way, really ...

Re:I think MS really SHOULD improve that ...

Except that the Xbox and Xbox 360 has been major economic sinkholes. From 2002 to 2004 the then Home and Entertainment Division made an accumulated loss for 3.5 billion dollars. From 2005 to 2007 the new Entertainment and Devices division made an accumalted loss of 3.7 billion dollars. So over those 6 years they lost 7.2 billion dollars. Imagine how hard it will to make that money back (plus the lost interest on it) from a division that has a 6 billion revenue per year and never has shown a profit.

Microsoft has tried several directions when it comes to break into new markets but let's face it, they haven't done a very good job of it. Their money comes from the Server and Tools Division and the Business Division (Office etc.). And I don't think it's going to change... perhaps because they aren't used to competing on merits alone.

2004 10-K (has the 2002 to 2004 numbers) http://www.sec.gov/Archives/edgar/data/789019/000119312504150689/d10k.htm [sec.gov] 2007 10-K (has the 2005 to 2007 numbers) http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=136-000119312507170817-22AR89VDNH3I307BANT6DSD928&docFormat=HTM&formType=10-K [businessweek.com]

Re:I think MS really SHOULD improve that ...

A perfect search portal with a perfect algorithm doesn't work.

This isn't about the search algorithm. Microsoft is clearly after Yahoo's user base and users that go to Yahoo for search. For what it's worth, they could scrap Yahoo's search algorithm completely, replace it with MSN, as long as they believe that users will still go to Yahoo after that.

Of course, Microsoft has done that before. Look at Hotmail for instance. They couldn't stand the fact that it was not Microsoft technology under it, so they just had to "improve" it on their way. Results? After Microsoft's "improvement" Hotmail ceased to be #1 in webmail and now must be around #957 in market share.

It's probable that if they finally buy Yahoo it will be just the same. Users will deflect in masses. First it will be the users that leave Yahoo because they don't trust Microsoft (say around 5-10%), then it will be the users that leave Yahoo because Microsoft "improves" the service with their own ways of "improvement" (say around 10-20%), and finally it will be the users that leave Yahoo because Microsoft will introduce its silly single platform locked-in technologies, like Silverlight, and they will try to integrate Yahoo with the desktop, which will make Yahoo no longer as "convenient" it is from the point of view that you can access it anywhere without restrictions (say around 20-40% users leaving because of this).

In the end, Yahoocrosoft will lose from 35% to 70% users, and Google will be a yet bigger #1 with a distant #2. I think Microsoft buying Yahoo will be bad for the search/ads market, but it will be good for the OS/desktop/browser market, because Microsoft will certainly weaken from this. I think it's worth to give Google that much power if we get rid of Microsoft in the process, so I'm happy with this and I actually want it to happen, as much sorry I am for Yahoo, but hey, if they take the bid, they're just asking for it.

If I were Microsoft, I'd try and refocus the company culture and align it with the interests of its customers

Yes! Exactly my point. If Microsoft tries to think "as Yahoo does" and doesn't intervene that much, it could use its money and power to actually make it grow and defy Google. But Microsoft is too clever! They'll want to turn Yahoo in Microsoft, they'll want to use their MSN knowledge to grow Yahoo. They'll want to "improve" Yahoo services by migrating them to Windows servers (as with Hotmail), they'll want to "leverage" the desktop on Yahoo services. That will be their biggest mistake. But it's inevitable, there's no way that Microsoft will buy Yahoo and not do that.

With a recession, ad buys with #2 get cut.

The 'customers' in the search engine industry are the advertisers, and the main interest of advertisers is reaching as many consumers as possible.

And in a recession, advertisers scale back their ad buys. Instead of buying in the top 2 in any market, they buy from #1 only. Even Microsoft admits that Google is #1.

The bid is public ... so

I think the public nature of the bid suggests that private behind-closed doors negotiations have failed and they're trying to attempt a near-hostile takeover. YHOO [yahoo.com] shares have jumped about 10 USD over friday and a lot of us have been getting rid of them. And I wonder who's buying all of these, in reality? Someone who'd pay 31 dollars for a share, when they could instead buy it in-market at 28?

I'd really hope it was some sort of last-ditch effort to put shareholder pressure onto Jerry Yang (yes, I do work at Y! and I do have a very nice job [php.net], which I'd be really sad to leave ...). And yeah, read my domain to figure out exactly why I would have to :)

Here's to hoping that it doesn't happen (for YUI, flickr, freebsd, hadoop and del.icio.us!)

More than near-hostile...

Here is a quote from the letter Ballmer wrote to Yahoo:

Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!'s shareholders are provided with the opportunity to realize the value inherent in our proposal.

That sounds like a full-fledged hostile takeover threat to me... "we can do this the easy way, or the hard way."

I think we can all agree that what Microsoft needs most is a complete change of corporate culture, not Yahoo. This would require a complete replacement of at least 80% of the Microsoft brass, however, so it's not likely to happen until the company is near-dead.

However, if Microsoft realizes that they need to change their corporate culture to attract a bigger audience/customer base, but doesn't want to go through the hassle of actually doing it, then theres one VERY EASY way to impart this realization onto the purchase of Yahoo: for the love of fucking god, DONT FUCK WITH YAHOO!! That means: no changing their servers from FOSS to Windows, no firing all of their managers, and no adulterating Yahoo's way of doing things with Microsoft's shittastic attitude (among other things).

Re:More than near-hostile...

for the love of fucking god, DONT FUCK WITH YAHOO!!

Unfortunately, at the end of the letter under his signature, Ballmer wrote in ballpoint pen, "Microsoft reserves the right to fuck with Yahoo."

Microsoft failed the minute

they stopped giving what the CUSTOMER wants.

Whenever you push an agenda different from the client's, the client walks.

They never did that

Microsoft was never about giving the customer what they wanted. Microsoft has been about making sure the customer only had access to Microsoft products. That meant they had to have products in the first place, sure; but Microsoft has manipulated the market so they were the only ones available. (This is heavily documented in their anti-trust trials).

They started doing this once IBM gave them an exclusive contract to provide MS-DOS for the original IBM PC. By the time Compaq and co. had their clones ready, MS-DOS was the only game in town. Later, when DR-DOS came around, it started making *serious* inroads. Microsoft then made per-processor deals with the OEMs, making sure a copy of MS-DOS was sold with every processor, whether it *shipped* with the processor or not. This made it economically difficult for the OEMs to sell DR-DOS instead of MS-DOS. (DR-DOS was *far* superior to MS-DOS.)

It's these bundling deals that kept Microsoft at the head of the market all those years. Once they got a significant lead, it became impossible for any other competitor to create a competing product.

Microsoft was helped by some incredibly stupid decisions by other companies, true. (SEE Novell, and their handling of Word Perfect and Novell Office, for instance.) However, it' Microsoft's ability to warp the market to their own ends that has kept them on top, *not* giving the customer what they wanted. (They were so successful at market manipulation, the customer often never knew there *was* an option.)

When there's only one trail, the customer can't walk. That's what monopoly abuse is all about. We don't call it "lock-in" just to amuse ourselves.

SOP

This has always been Microsoft's way. They bought "Word" and (depending on how you interpret it) they bought "Dos".

Not 10 years ago people were proclaiming the death knell for Microsoft because it missed the internet... then they bought "Internet Explorer" and... well you know how that turned out.

Microsoft has always made stumbles. Where they've excelled is their resilience to find the right solution and implement it in a good enough/cheap enough fashion that it doesn't make sense to buy the other guy.

Can they do this against Google? From a customer stand-point I'm not sure. I'm not just going to use Microsoft Search(tm) over Google so long as Google remains free and provides decent results. So Microsoft can't really win there. But they can steal ad revenue from Google by making their business/web-ads side more appealing to businesses. Get that, control the ad market and you'll be able to embrace and extend Google...

But this is a sign that Microsoft is "failing"? Not on your life...

Re:SOP

I once saw a site that had a detailed list of all the companies and the technologies that Microsoft has purchased over the years. The list was staggering...

In addition to DOS and Word that you mentioned, one thing that people might not know is that Microsoft bought a company called "Webcorp" in the '89-'91 range (I can not recall exactly). This company had created a rather slick Lantastic-like networking system on top of DOS. Being a BBS sysadmin (sysop in those days...) I was one of their beta testers and as a thank you for being a beta tester, I was always given the latest version of their software and watched it grow fro "functional" to "excellent."

long story short... Microsoft bought Webcorp and the Lan technologies they had created and hey... What do you know... Suddenly, out of Windows 3.1 was borne "Windows For Workgroups". Now with NETWORKING!... Another Microsoft triumph and INNOVATION...

The point of my long winded story? Microsoft is _NOT_ an innovator. Unless you define innovation as: a. Purchasing companies, or licensing technologies in order to incorporate them into an existing product or b. Purchase companies or technologies only to shelf said technology in order to promote their less capable, more buggy product.

I for one have been watching this endless cycle for years now (since '89 or '90) and have been fed up with it since just about that time. :(

Re:SOP

May I ask...who cares if Microsoft is not an innovator? In your example, Microsoft recognized a technology that, per your admittance, is excellent. So instead of them developing their own networking system for Windows, they realized that incoporating an already developed and tested system is far better for them and their users.

Everyone purchases other companies or licenses technologies from them. Guess what? OS X? Built off BSD and NextOS. Safari? Built off webkit. Google purchased Picasa, Sketchup and Earth Viewer (ie Google Earth). This 'endless cycle' you speak off is not limited to Microsoft.

Overconfidence

Microsoft has been overconfident in its approach to the internet from day one. First by believing they could deploy an alternative, then ignoring the Netscape threat early on instead of buying them outright (back when they were still up for sale for a few hundred million). They repeated the same mistake with the search engine market, with a myriad of failed search engine initiatives from within rather than buying outright an external player.

About a decade ago, Microsoft balked at paying $8M for one of the key players, about three years ago, they were wincing at spending $20M in a decent search engine effort. "You'll end up paying billions for a search engine company if you don't spend this money now", was my advice. They didn't listen and here we are $46 billion dollars later after the FAST and Yahoo! acquisition.

Salon had a very similar piece today

Salon had a very similar piece today [salon.com] in its "How The World Works" column by Andrew Leonard. Leonard can be a very dogmatic statist when it comes to economic policy, but I think he pretty much nailed the tenor of this deal:

Except that this Microsoft bid, made at the late date of February 2008, even if it can't be considered a move made out of desperation, is at the very least a move generated by massive frustration. Try as it might, Microsoft cannot gain ground on Google -- the company that currently claims ownership of the soul of Silicon Valley [salon.com] (as in -- we can have fun and make a bazillion dollars). So where once a Microsoft bid for Yahoo would have been seen as presaging the long-awaited total triumph of Gates and Co. over the freewheeling Valley, now all it does is prove that winning every battle it fights is no longer a Microsoft birthright. Microsoft is playing catch-up from further behind than ever. The future requires a major beachhead on the Web. Microsoft, after at least a decade of Herculean effort, still doesn't have one. So it wants to buy the biggest one it can find.

I wonder what effect a Microsoft buyout of Yahoo would have on various open-source initiatives Yahoo is involved in. Microsoft wouldn't be so dumb as to kill them off immediately -- that would be bad press, and possibly invite retaliation from the next Attorney General -- but their history at Hotmail indicates a revulsion to all things open source.

Ballmer's in charge

He is now in the driving seat. While MS have always bumbled along with things I now see this getting a bit personal and a bit more precarious. Ballmer is an interesting character. A lot on here (probably rightly) have characterised him as mental. He seems like a deranged and obsessed guy. I mentioned MS "bumbling" along because that is what they did under Gates (sure they embraced, extinguished), but they never took vast risks. Now that Ballmer is in charge I can't shake the feeling that MS's future is a lot more risky - for Ballmer's personal obsession with "destroying" Google could take MS into a very different neighbourhood from Gate's more careful approach. Ballmer is now starting to risk the family silver on beating Google. You only have to look at the comments from the conference call yesterday to realise it - "The market continues to grow, and the leader continues to consolidate position," - never mentioned them by name, but he is clearly obsessed about Google - if I were a shareholder I would be worried that his personal obsession is impairing his business decisions.

Re:Ballmer's in charge

The Ascension of Ballboy to the Throne of Microsoft is the clearest sign that Microsoft has weak senior management and is embarrassingly impoverished in vision.
Ballboy's unwillingness to speak the name of the "fucking guys" he was supposed to "kill" years ago shows how charmless and obsessive he can be. He is like a less personable Joseph Stalin with no big fur hat. His reign of terror will come to an end when Microsoft's shareholders start worrying about ~their~ value.

Microsoft has muscle, big teeth and claws and a walnut-sized brain. People like a company with cool ideas and vision. Google hits many notes perfectly. Apple hits some notes extremely well. Sun can sing but its ears are plugged. IBM gave up singing and now likes to set up the microphones. And Microsoft is the Michael Bolton of software.

(YHOO+MSFT) = $6.5 bn loss in value

Looking at the market's response to this announcement, it seems that the merged YHOO+MSFT are worth at least $6.5 billion less than they were as separate entities. Yesterday MSFT lost $19.3 billion in market cap, but YHOO only gained $12.8. (If you factor in NASDAQ's overall rise, then these numbers are even worse -- suggesting perhaps a $9 billion loss of value from the merger.)

MS should merge with ...

Exxon Mobile. They're a bit more profitable than Google (ROE: 33.33% (XOM) vs. 22.74% (GOOG))and the synergy towards a truly evil empire would be achieved faster.

I think, I need to send my resume over to MS for the position of V.P. of Evil Strategy because they're just not cutting it anymore. I mean, really, Google is still around!? Geeze!

"Don't be evil"

A lot of people have faith in Sergey Brin's corporate motto. The creation of class B stock at Google, which gives Sergey and Larry ten votes for every share, ensures that they will be able to keep Google from being corrupted, so long as they themselves remain uncorrupt.

Microsoft has no such public image. They were found [justice.gov] to use their monopolist position to kill Navigator and hurt Java. Their CEO is belligerent and takes shots at the FOSS community. More recently they've tried to buy the ISO vote for OOXML [os2world.com]. They don't trust their own customers, as evidenced by periodic, rude and disruptive Genuine Advantage challenges [wikipedia.org].

We're about to enjoy a big, fat, open class C block in the US spectrum, courtesy of Google. They purchased Android, and then opened its SDK to the world. In contrast, Microsoft has promoted hardware restrictions [wikipedia.org], media restrictions [wikipedia.org], and discourages use of unemcumbered codecs such as Ogg Vorbis.

Which company would you rather do business with, all things being equal? That is Microsoft's problem. They can spend all the $billions they like on buying market share... but they can't buy a reputation. When the FTC clears the Yahoo deal... Microsoft will still be Microsoft.