May 4, 2008

Microsoft Walks!

So, I'm sure there will be much written about the Microsoft-Yahoo Saga, by folks who are much more knowledgeable than I am. Here's my two cents though... Microsoft clearly expected that the deal would get done one way or another - evidently, everyone underestimated the resolve of Yahoo's core Investors. (By core investors, I mean those who have a personal connection with the company and its brand, and not the fat cats on the board who've been along for the ride. In previous commentary, I maintained that Yahoo seemed ready to do almost anything to stave off Microsoft - even considering partnerships which were clearly not in its best interest, or those of its Investors. I'll admit though, even I was surprised by the Yahoo-Google pact.
It wasn't so long ago that Yahoo was touting the breakthrough capabilities of Panama - and the value it would bring to its network of advertisers. The deal with Google will most certainly result in incremental Search Revenue - but at what cost? In his letter to Jerry Yang, Steve Ballmer rightly commented on the impact of the deal on Yahoo's Engineering Team and its position vs. Google. The Winner!The net-net is that Google is the winner here. It remains the strongest player in the online space and its two main competitors are left weakened by an incident which will cast doubt in the minds of their customers about the quality of their Search Platforms. If Yahoo does go ahead with the pact and actually start monetizing some or all of its traffic volume through Google, that could signal the end of the Overture Platform. In effect, over 80% of the queries driven by Major Search Engines could be monetized through the adwords platform. I expect regulators won’t let that happen though, so we’ll have to see how that plays out.

Both Yahoo and Microsoft have lost out here. Microsoft because, this entire fiasco has been a distraction for the Management Team and probably has sown some doubts in the minds of many investors, about our entire Online Strategy. More impotantly - Microsoft monetizes it's Search Engine through Overture - in key markets across Europe and Asia. If Yahoo can't or won't actively invest in winning new clients for Panama, both companies will continue to loose ground to Google Globally.

The Biggest Loser
Yahoo - is the biggest loser, because it's handling of this issue casts doubt on its strategy and its ability to survive as an independent entity. The prospect of incremental revenue by monetizing with Google's adwords and even adSense won't be sufficient to stem the freefall of its stock - come Monday (05/05).
I’d said before that Google had much to gain in the short term, even if the deal went through, because the way in which Yahoo reacted to MSFT’s proposal was so negative that the Integration process would have been pretty challenging.

As things stand today, it’s hard to think of a way to spin this – that looks good for either Microsoft or Yahoo. Certainly, Microsoft can solider on and will benefit from its size and scale – and from market place that is growing increasingly uncomfortable with Google’s Monopoly of Online advertising Revenue.

I’d be interested to see how the Financial Markets react to Yahoo’s stock – come Monday Morning. The Stock reached $29.70 on Friday 05/02 and was at 26.82 in after hours trading.

No comments: