Microsoft and Yahoo: Better than Merger, Less than Perfect

Rob Enderle

Today the relationship between Yahoo and Microsoft was defined, and the market punished Yahoo because it wanted the cash from a merger. It rewarded Microsoft because it thought the merger was stupid. What has been detailed appears to follow the model of a good partnership where the parties are focused on what each does best, but partnerships in general are problematic and most end in failure. These failures can be mitigated, but only if they are anticipated. Generally when things start going bad, it is too late. Let's take a look at this one.


Microhoo: Nice Honeymoon


On paper, this is a marriage made in heaven in that it takes the advantages of one company and marries them to the advantages in the other for a synergistic result without the cost and risk of a merger. This is more like a marriage than a typical merger because a typical merger eliminates one of the individuals. In this case, both individual companies remain intact but are now financially and strategically tied together.


Yahoo's advantages come with its larger market share, which means it has more relationships with more advertisers than Microsoft does, suggesting that this is its strength. Yahoo has also been operating on a skeleton budget for some time and its technology has lagged, as has its ability to update it. The cost of even trying to keep up with Google and Microsoft would seem to exceed significantly its resources. If it didn't partner, it likely would have been bled dry as collateral damage in the Microsoft Google war.


Microsoft, even with a better product and solid marketing, is discovering that once habits are formed people don't like to change the tool they are used to. The fact that Yahoo has retained 20 percent of the search installed base speaks to this because it simply hasn't been competitive for some time, yet a huge number of folks have stayed with it. At current rates of about 1 percent a quarter, it would have taken 20 quarters or five years to get to where Microsoft would be by buying Yahoo, and the acquisition was not supported by the majority of Microsoft's current stockholders. And this five-year prediction would be only if Google and Yahoo did nothing. Google is clearly planning a response. So this weds Yahoo's superior (to Microsoft) base and entrenched sales engine to Microsoft's better technology and massive development budget. Microsoft saves both time and money in building a base; Yahoo steps away from a massive development budget it couldn't afford anyway, and you have a happy groom and an ecstatic bride. But honeymoons don't last forever.


Will the Marriage Last?


The problem in a typical company when sales don't meet expectations is that sales runs around complaining about the product and/or pricing, and development runs around complaining about incompetent sales people. In that case, the CEO, whom you can think of like an all-powerful marriage counselor, steps in and mediates the dispute, cracks a few heads, or finds a new person to run development or marketing. Now, even in a company, the result likely has more to do with whether development or sales is better connected (who plays basketball with the CEO), but the resolution, while often wrong and unfair, falls short of armed combat (generally, though there was one time).


Partnerships, like marriages, are peer relationships, which mean that if one side believes strongly in one thing and the other believes in something that is the opposite, like whether sales or product is the core of a revenue problem, you can get an ugly divorce. The potential for that is here. I've seen far more partnerships end in divorce than be successfully executed. This is generally because during the courting phase, much like it is with people, both sides are working to make a deal and problems are something they are trying to overcome, so looking for more seems counterproductive.


Wrapping Up: Could It Save Google?


I spent some time talking to both Microsoft and Yahoo executives. They are convinced that they have mechanism in place to deal with problems coming up between the two companies. They didn't provide enough detail that I am currently equally convinced, but time was limited. If they did mitigate this natural area of conflict between sales and development, the result of this partnership could actually be better than had Microsoft and Yahoo merged because, even in one company, this kind of problem is one of the more prevalent causes of failure. If they didn't, then both companies lose. Yahoo likely fails outright, and Microsoft's executive team will get a dramatic and painful adjustment. As a result, both firms are motivated to get this to work, but then that is pretty much true of all partnerships and marriages. The test will be whether they can stick through the hard times -- and that test is in their future. Whether they succeed or fail, this will be a great lesson to learn from.


One final thought: Google was clearly on a path to self destruct; it simply was too unfocused. This deal, on top of Bing, was a solid slap in the face to Google, in line with the slap Netscape gave to Microsoft in the early browser days. If it forces Google to focus, it could, ironically, save that company.

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