Early Thoughts on the Microsoft/Yahoo Deal….Yahoo Did Better Than People Think

Lots of early takes on the MSFT/Y! deal so far and most seem to think Yahoo got fleeced. The post getting the most attention so far is Jason Calacanis take that Yahoo committed “seppuku” while Mike Arrington thinks Yahoo “gutted itself”.

I want to take the other side of this and say that this was a good move for Yahoo (even if the implementation is overly complicated and holds plenty of execution risk.) The only opinions that I have seen that think Yahoo did ok with this are Bill Gurley and John Furrier.

Frankly, this deal is complicated and may end up hurting both companies, but I think this deal was better for Yahoo than people think.

Let me bring up a few points.

Getting out of the search market: Calacanis and Robin Wauters at Techcrunch both write that Yahoo has given up on the search market….How do they know that for sure? Certainly Yahoo is no longer developing an algorithmic keyword search engine and will no longer play in the crowded search marketing game, but is that really the entire search market? For two people with ties to Techcrunch, which recently put on a conference devoted to the opportunity presented by real-time, they certainly seem to be missing the opportunity for real, not incremental, innovation in search. There is certainly no guarantee that Yahoo will go down that path but it would seem a smarter path rather than chasing Google in a game that Google is dominating.

Company Focus: The critics of this deal seem to miss the fact that Yahoo will emerge a much more focused, streamlined company. As the deal stipulates, Yahoo will maintain the ad salesforce force for premium search advertising. So rather than addressing every piece of the search marketing ecosystem, Yahoo will focus on cultivating premium, high-margin search deals and pair that with their numerous content properties that rank #1 in the world (finance, sports, etc). Search seemed like a distraction when viewed through the lens of Yahoo’s strengths. Even if this move simply gets Yahoo to focus on its strengths rather than weaknesses, it seems like a step in the right direction.

Whither, MSFT?: This is a 10 year deal? Really, what will MSFT look like in 10 years? I have been thinking about a blog post about the future of Microsoft. Given Microsoft’s announcement that quarterly revenue fell 17% year/year and with the threat of Google’s ChromeOS and the emerging Netbook market possibly making the bleeding worse in the years to come, what will MSFT look like in 5 years? Forget about 10.

But 5 years is an interesting period of time because Yahoo will keep 88% of the search revenue for those 5 years. MSFT is making an enormous monetary bet on search (on top of what they’ve already spent)…which is a game they can’t win.  What will the search market look like in 5 years? What kind of growth in social media marketing, breakthroughs in social search or real-time search and any innovation or any comeback in display advertising affect the market or marketshare? Five years is a long time in the Internet business, and doubly so at this particular moment. By the time any meaningful revenue, not just marketshare, goes to Microsoft, what will being #2 in the search market really mean?

One last point where I would like to vehemently disagree with Jason Calacanis…betting on a space because Microsoft is betting on a space is NOT a good strategy. John Dvorak and MG Siegler have both penned eloquent responses that suggest as much so I won’t add anything to their analyses. 5 or 10 years from now, maybe Carol Bartz will be seen as having fleeced a directionless dinosaur who was still throwing money around at a declining opportunity.

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July 29, 2009 | Filed Under Internet 

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