February 2nd, 2008

What Microsoft Buying Yahoo Really Means

by

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.

Comments (14 Responses so far)

  1. perfect. exactly. thats what makes this big and boring.

  2. [...] Karp’s Publishing 2.0 blog has a very interesting analysis of the proposed Microsoft/Yahoo merger: The main problem with Microsoft and Yahoo, looking forward, is that they are not web-native [...]

  3. do you ever wonder if the ad revenue based business model has a future? i do. too much ad space, too few ads, consumers overloaded, or smarter, even resistant …

    for me, few things are worth acquiring if the price is my attention being assaulted, and would not be surprised to see google and others struggling with this problem in the future

    it is easy to say it like this, my time is worth more than your income

  4. Have We Entered The Era of The Functional Web?…

    The New York Times has an article on how the potential sale of Yahoo! to Microsoft could be bad for minnows, i.e. small Silicon Valley companies looking to be acquired. I think this is a short sighted viewpoint.
    In the late 1990’s dot.com era, th…

  5. [...] it pretty much covered, if you want a more financial analysis of it, go to SAI for full coverage. Scott Karp Bubblegeneration Paul Kedrosky The Times has a good article today on the deal, as well as an [...]

  6. Scott,

    That was as honest a “smokin fastball” under the chin can be–no mistaking the message.

    As a former national acct exec for a software reseller, I managed the software licensing for a very large bank that loves cowboys and indians.

    Microsoft’s entire model is going down in flames with shareware, free software downloads, and the fact that no Microsoft OS is worth changing year after year.

    When Murdoch takes WSJ to free status, although not directly related, it is a strong signal that the web will replace many business models reliant upon the old standard of delivery–real world tangible.

    Great article.

    dean

  7. 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.

  8. [...] What Microsoft Buying Yahoo Really Means | Publishing 2.0 Quote – Above all, the future belongs to companies that can leverage the network — and that can become the network. (tags: media) SHARETHIS.addEntry({ title: “links for 2008-02-04″, url: “http://www.rexblog.com/2008/02/04/17482/” }); permalink | categories: All other | Time posted: 4:00 am on Monday, February 4th, 2008 [...]

  9. 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.

  10. [...] Le problème est que Microsoft et Yahoo ne sont pas de vraies entreprises web, reposant sur des modèles centralisés de contrôle plutôt qu’un fonctionnement en réseau. Ils reposent sur des systèmes fermés (windows, office, clients messagerie, web mail) qui ne redistribuent pas de valeur au réseau, ni ne bénéficient de son effet. Microsoft et Yahoo se comportent comme des entreprises de médias classiques alors que les décisions de Google ne suivent pas les réflexes traditionnels. Scott Karp | Publishing 2.0 [...]

  11. 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

  12. [...] What Microsoft buying Yahoo really means – Scott Karp blogs about the significance of Microsoft’s offer to buy Yahoo. [...]

  13. 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.

  14. 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.

Add Your Comment

Subscribe

Receive new posts by email