Microsoft-Yahoo - Perhaps the First Internet/Mobile Internet Combo
8 February 2008Rethink Research’s Peter White did the following analysis on the impact that Microsoft’s acquisition of Yahoo could have on the Internet, particularly the mobile Internet. For more information, please e-mail charles@riderresearch.com.
Microsoft’s $44.6 billion bid to acquire Yahoo, and the hostile reaction from Google, has dominated the week’s technology news, and if the deal goes through, it will have a profound impact on more than one market.
From the pinnacle of Internet traffic dominance, rivaled only by Google, this is a fresh assault on the entire Internet, and for us that means all video traffic over the Internet and especially new traffic concepts like mobile Internet portals, gaming portals, mobile access to user-generated content and social networking sites, and professional video over the mobile Internet.
Many of these markets are at their beginning and the one thing that makes the combination work for us, is the collecting together of two Internet majors in MSN and Yahoo (and perhaps Xbox Live!), with varying success areas, into a single entity (presumably called MSN Yahoo or just Yahoo with a bit of a “go faster stripe”). Actually right there we have a problem, the branding. Google says cheeky, exciting, innovative and scared of no one; Microsoft says business to business with low consumer appeal and PCs full of security problems and Yahoo says archaeology of the old Internet world. MSN is perhaps the most appropriate brand to retain, but of itself it is too techie.
The deal was the only way that the declared intention of Microsoft CEO Steve Ballmer could be reached, that of getting 25% of Microsoft revenues from advertising within a few years. Given that this is around $14 billion and that Yahoo may bring half of that, then MSN makes up another quarter in two years perhaps and other Microsoft acquisitions, its share in Facebook, its aQuantive and Atlas revenues, may perhaps get it to the collective point where Ballmer wants to be, but only if the company can merge these entities together in a way that stops them shrinking, not a way where overlaps are deleted, and it drives more business to Google.
Assuming Microsoft succeeds in what is an audacious bid to neutralize Google, the deal will also show the company finally accepting that Windows is no longer its future, and that it must dominate the Web and applications across platforms, in order to generate growth and remain relevant. This will put it even more directly in conflict with Google in the broad Internet market, and in the mobile world it will gain its first credible chance to be a major force, something that will raise profound issues for Nokia, which has recently embraced a number of Microsoft technologies, such as DRM, perhaps believing that Microsoft was no longer the enemy, but Google was, as Nokia comes more and more to pin its growth hopes on Internet services, not hand-sets.
The impact of such a fundamental shift in Microsoft thinking - one that is long overdue, held back by the attachment of CEO Steve Ballmer to the traditional operating system model - will be profound, and put a combined MSN and Yahoo at the center of the company’s future. Strategically this makes good sense, gaining Microsoft a company that has strong Web technology, customer base and brand, despite its recent appalling commercial execution. However there will be an almighty culture clash between the “can do” approach of Microsoft and the “that will do” approach of Yahoo.
Microsoft is not known for its skill in integrating acquisitions, but the decision to bid for Yahoo certainly indicates that Microsoft understands where the future of software lies and is determined not to let the Internet players have it all their own way. It can no longer act purely as an arms dealer for Web players, providing technology, since most of them provide their own.
The offer price of $31 a share, a 62% premium on the closing price of Yahoo common stock the day before the bid was announced (Yahoo shareholders could choose to receive either cash or stock) shows that the powers that be within Microsoft “get” all that. Rumors abound of rival bids, some of which could have Google’s support, although anti-trust concerns would probably prevent the search leader from bidding directly. AT&T, News Corp and Time Warner’s AOL have all been mentioned as possible co-bidders, though no offers have yet materialized and in our view they won’t. The issue here is perhaps what happens to these aging Internet powers. Will they operate quite so well in an Internet world with two giants, not one, and how in particular will AOL fare on its own against this pairing? Some bidders will surely be thinking of acquiring AOL instead.
Some Yahoo investors will be keen to get a bidding war going, as despite the company’s recent troubles, they argue the 62% premium is insufficient, given that Yahoo shares traded at $33.63 ($2.63 above the offer price) as recently as October, and that Yahoo holds cash and shares in publicly traded companies, including Yahoo Japan and Alibaba Group Holding, with a total market value of more than $12 per Yahoo share.
“We have great respect for Yahoo, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market,” said Ballmer in his offer statement, which explicitly referred to the threat from Google. “Today this market is increasingly dominated by one player. Together, Microsoft and Yahoo can offer a competitive choice while better fulfilling the needs of customers and partners” - comments clearly directed at possible antitrust probes, although the presence of Google and, to a lesser extent, Time Warner’s AOL in the portal market suggest that such investigations would clear the deal (provided Microsoft obeyed the usual restrictions on not tying its portals and Web applications into Windows).
Microsoft hopes the transaction would clear in the second half of this year, though regulatory processes could drag it out until the end of the year or even early 2009.
While Internet search and advertising are the key current battlegrounds with Google, both companies will have a keen eye on the future potential of mobile applications - Web, video and IM. This is a market where the positions of the major players are very different to those in the PC Internet. Google has not yet won here with its Android initiative, Microsoft is so far nowhere and while Nokia and Sony Ericsson are putting up their hands with purely mobile portals, Apple has a presence. But Yahoo has been the most impressive of the portals in the mobile world, even though it has failed to convince the stock market of this, and its activities have not been enough to affect its corporate performance yet (the company has been struggling, and last week said it would slash 1,000 jobs in the fall-out from a painful fourth quarter that saw profits fall by 24%, together with weak guidance for fiscal 2008).
Yahoo has steered clear of Google’s strategy to promote an alternative carrier model, based on open access and universal Web connections, and guaranteed to provoke the hostility of traditional cellcos, particularly in the US. Instead it has built strong relationships with many operators, particularly in Asia, and claims the market lead in mobile Internet traffic. Yahoo was the top ranking Internet brand for mobile Web surfers in 2007, according to Nielsen Mobile, drawing more than 16 million unique visitors per month, ahead of Google on 11 million and MSN on just over 9 million.
In addition, Yahoo has been very advanced in key mobile Internet technologies, and has greatly enhanced its Go Mobile platform, and at the recent CES show, made this fully open, stealing the high ground from the unproven Android. Its open Mobile Developer Platform is designed to show off what are clearly Yahoo’s strengths compared to Google - its superior technology, in terms of mobility, developer functionality and maturity - as opposed to its weaknesses, notably its poor marketing and market weight.
If the simple name Microsoft does not scare off existing Yahoo business, and if the branding issue can be correctly resolved, and the merging of the two distinctly different corporate cultures, then it can continue to lead in what will one day (around 2012) be the biggest Internet access device on the planet, the handset.
All this will strengthen the mobile Internet offerings of Microsoft, which is feeble and give it the chance to have a real impact on the smartphone sector at last - not through Windows Mobile, which has not gained serious traction outside the enterprise device market, and which is likely to lose ground to Linux; but through Web services, search, advertising engines and innovative user interfaces, and our territory, video.
Yahoo would give Microsoft a developer community, brand, services and user base in the mobile consumer sector where it has previously failed to have its usual impact, and all that would complement its strength in mobile enterprise applications. This would be tough for Google, which as we have seen is already struggling to turn its high sounding mobile ambitions into real products and market share. The search giant’s initial reaction was to argue that a Microsoft-Yahoo tie-up would be bad for competition, and to offer Yahoo any help with fighting off the predator.
If the acquisition proceeds, we can expect to see Google plowing large amounts of its plentiful cash into developments and purchases of its own to consolidate its position in the PC base and kick start its mobile efforts - perhaps with a shift away from initiatives with longer term pay-off, such as buying spectrum, and a stronger focus on ready-made products and services, and on alliances with powerful carriers.
To talk to Peter White about the Microsoft offer to acquire Yahoo, please e-mail charles@riderresearch.com to make an appointment.
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