Microsoft and Yahoo - bigger may not be better

I can't resist putting in my two cents on the Microsoft bid for Yahoo.

My take is that it helps neither company. Here's why.

Microsoft has assembled a huge Internet presence. They have done it in a very workman-like way.

They decided the web was important so they started, and eventually won, the browser wars. The misconception on Microsoft's part was that browsers were important when in actuality it was the Internet itself that was important. The ability to be a player that could take advantage of the Internet's reach, its content, its ability to extend communication and community globally turned out to be much more valuable than controlling the on-ramp to the web. The browser was another piece of desktop software, something Microsoft was very good at developing, but the browser meant little in terms of signaling that Microsoft really understood the web.

Content is king, or is it?

Since the browser wars Microsoft has determined that they needed to expand their web presence. They purchased and expanded Hotmail in order to establish a foothold in the free web-based email space. The success of Hotmail ensured a steady stream of users and eyeballs to Microsoft properties. As successful as Hotmail has been, it has not been a particularly innovative concept. The same with their instant messenger offering, something which was done first by AOL.

News and Finance are strong areas in Microsoft's content lineup. Once again, these are not innovations but a response to the success other sites, including Yahoo, have had with this kind of content. To Microsoft's credit, they have done a very good job crafting this content and have been rewarded with strong traffic and solid revenues.

And so it goes with online product after product. MSN.com offers all the same kinds of content Yahoo does including search, shopping, games, etc. In spite of the traffic numbers and billions in revenues, Microsoft still loses money on their Internet initiatives.

The similarities between the two company's web offerings are striking as are the similarities in investors' attitudes toward them. Both are perceived to be in a situation where they offer excellent content, generate huge amounts of traffic but fail to monetize the operations sufficiently. And both are widely considered to have missed the transition from Web 1.0 to Web 2.0. It is looking like Microsoft's investment in Facebook came at the peak of the social networking phenomena. Recent reports suggest traffic to Facebook is beginning to fall off.

Why putting Yahoo and Microsoft together would improve this situation is a mystery to me. I just don't see where greater scale makes a $44B difference.

Fighting it out on the advertising front --

So it is clear that both companies are having trouble wringing profits out of their marquee web properties. Neither one does much with the subscription model so it all comes down to making money from advertising.

Here again we have similarities. Both offer search advertising but neither does it as well as Google. Google's AdWords platform is so simple to use that it leaves all others in the dust. It provides absolutely no impediment to small advertisers and offers large advertisers the scale they need. This ensures a tremendous amount of usage for the AdWords service. And Google has software superiority. Google's ad placement algorithms do a better job to ensure that relevant ads appear on search results pages and their search algorithms ensure that search results are deep and wide-ranging. Users trust Google to return the best search results; hence, Google's market leading performance in the search and search-advertising categories.

Microsoft and Yahoo have both tried to duplicate the success of Google's search-based advertising; however, neither has tried to do much of anything that can come close to competing with Google's AdSense network. Here is another multi-billion-dollar pillar of Google's advertising edifice. Google has enlisted hundreds of thousands of web site owners, large and small, to host ads via AdSense. Web publishers find this system simple and easy to use and it's free to join. It allows even the smallest niche players the ability to make a few cents or a few dollars from users clicking on ads. Those pennies and dollars add up and Google gets a cut from every click.

When it comes to banner ad placement, Yahoo is probably the leader but all three of the companies are beefing up their capabilities in this area by buying online advertising companies. Google bought DoubleClick, Microsoft bought aQuantive and Yahoo bought several players including BlueLithium, Overture and Right Media. All three are working to create sprawling ad networks that work across multiple properties, serve different kinds of marketing partners and bring to bear various methods of smart ad serving.

Conclusion --

What we see is a company having trouble monetizing its web properties (Microsoft) buying a company whose ability to monetize its web properties is eroding (Yahoo). $44.6 billion is a lot for Microsoft to spend essentially to acquire an ad network and duplicate its online offerings. The results will be bigger but they may not be better. What is needed is a visionary leader, something both company's seem to be lacking.

Disclosure: author has no position in MSFT or YHOO