February 2nd, 2008

What Microsoft Buying Yahoo Really Means

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Perhaps you don’t need any more explanations of the significance of Microsoft’s offer to buy Yahoo, but I don’t want to lose my media/tech blogger license, so here’s mine.

Microsoft’s acquisition of Yahoo is akin to newspaper industry consolidation over the last few years — combining business with solid cash flow to achieve some efficiencies and market share consolidation, but without visibility into the long-term viability of the consolidated business models.

The main problem with Microsoft and Yahoo, looking forward, is that they are not web-native companies — they rely on centralized control models, rather than distributed network models — thus they are not aligned with the grain of the web, which is a fundamentally a distributed network.

Microsoft and Yahoo rely on software lock-ins (Windows, Office, IM clients, web mail) to maintain their user bases — but without distributing any of that value to the network or harnessing the value that the network would give back if they did. As such, they do not benefit from network effects, which is precisely what powers Google — and why Google will likely still beat a combined Microsoft/Yahoo.

Jeff Jarvis has written about the difference between Google and Yahoo many times, but it’s difficult to break through traditional media business thinking. What drives the success of Google and other web-native companies is completely counter-intuitive from the perspective of what drove the media business before the web.

Media use to be about tightly controlled silos — now it’s about loosely affiliated, distributed networks. Legacy business can, potentially, evolve and survive, by only through a radical change in thinking.

The future of media belongs to web-native companies — particularly those who can innovate web-native business models — that’s what Google did with AdWords’ liquid market.

Above all, the future belongs to companies that can leverage the network — and that can become the network.

  • And the really sad part is that all they'd really need to do to combine their inventories (and hypothetically compete with google's scale and network effect) is to allow each other's advertiser's to bid on placement in each other's networks.

    API OR really distracting merger. I think I'd choose API.

  • Erik Liet

    I agree with Kevin (see reaction nr 9). Look at the Yahoo Answers product and Flickr. That is web native web 2.0 stuff. Very good user generated products.

  • Hi Scott,

    You always end up summarizing things so well!
    I've very similar perspectives, but from the hopeless optimism perspective that with some character, Yahoo! might just be able to climb out of this.

    http://weareindia.blogspot.com/2008/02/api-arrogant-pricks-inc.html

  • Kevin Bartus

    Uh.... Yahoo isn't a "web native" company?

    Isn't that like saying Microsoft isn't software-centric? Or Ford isn't car-centric?

    I sort of get the criticism of Microsoft, although for a non "web native" company they sure crushed Netscape.

    Google does search. And they try lots of other stuff.

    They have most of the search market, which is now about as big as display advertising.

    Very much akin to Microsoft's dominance in desktop, which they use to give them piles of cash. To try lots of other stuff.

    This "centralized v. distributed" argument is as old as Oracle's network computer concept, and probably older.

    It just doesn't matter.

    Having one solid thing that rocks and kicks cash into the coffers to try other stuff comes in extremely handy.

    Microsoft - Windows/Office.

    Google - SEM.

    Yahoo - ?

    That's sort of the point.

    When there were like five portals on the web, having a "lock" on bulk display advertising was terrific. Like having a lock on desktop software or SEM.

    But even if Yahoo is still huge on the web, it's relative portion of display advertising necessarily shrinks daily.

    Yahoo is a great company, and IMHO the Microsoft purchase will help them remain relevant amidst the dual pincers of Google and the continued mass proliferation of new sites like Facebook, YouTube, and the thousand other new sites that are launching every day.

  • Scott wrote: "Microsoft and Yahoo rely on software lock-ins (Windows, Office, IM clients, web mail) to maintain their user bases — but without distributing any of that value to the network or harnessing the value that the network would give back if they did. As such, they do not benefit from network effects, which is precisely what powers Google — and why Google will likely still beat a combined Microsoft/Yahoo."

    Scott, forgive me, but it sounds like you're winging it here. Network effects, according to common economic sense, leads to lock-in.

    Here's BusinessWeek in 2003:

    "Strong network effects like these result in 'customer lock-in.' This occurs when users become comfortable working with a particular technology, such as Windows 2000 or PlayStation 2, and using applications and software that go with it. Once a user latches on to a particular technology platform, it becomes very costly to switch..."

    Clearly Microsoft has benefited from network effects through its history. Past performance is not indicative of future success, but you can't just base an argument on populist "power at the edges" voodoo.

    My gut sense of what it comes down to is that Google provides the best service at no real cost for millions of users worldwide. That's pretty powerful. That's why people side with Google and not the telcos in the network neutrality charades. Google makes people *feel* empowered (and, to a lesser extant, so do Apple, Yahoo, and even Micrsoft). A lot of that is simply marketing.

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