Microsoft! Buys! Yahoo!

By Eric Lundquist  |  Posted 2008-02-01 Email Print this article Print

Well it hasn't bought it, but it's proposed a buyout. Can Steve Ballmer and company finally carve out a much desired space in the consumer Web by buying an early pioneer that has lost direction?

The combination would put Microsoft in the No. 1 position on the Web for a destination site. Yahoo holds that position currently and combined with the MSN site, Microsoft would have a potential, dare I say monopoly, lead dog position. Ballmer has repeatedly said the company will do whatever it takes to become a major player on the Web. If that requires a $44 billion takeover of ailing Yahoo (and maybe increasing its paltry 1.6 percent $240 million investment in Facebook), Microsoft and company are more than willing to spend the money. Microsoft recently reported a strong quarter and has cash reserves that can absorb a Yahoo takevover as well as other investments.

I'm going to assume Jerry Yang would be more than happy to take the money and run at this point. You know that all those stockholders who have seen the share price plummet and continue to look downward as Yahoo engages in a strategy of the week turnaround plan, would love to see this deal go through.

In the larger picture, the new Microsoft! would look far more like a media company than a software developer. The Windows franchise has been a great money generator for the company as every PC sold and every server that gets upgraded essentially pays a tax to Redmond. Even an operating system that has less than stellar reviews such as Vista produces profit margins that any loan shark would envy. But can a company even of the Microsoft size focus on two (three if you include games) areas at the same time? Can Microsoft! integrate Yahoo into the MSN business, create a realistic Web-based application platform and also keep its corporate IT customers happy with a consistent stream of new products and upgrades? That is a tall order.

And of course, there is Google. The Microsoft bid comes at a time when Google shares have fallen despite a strong fourth quarter, but there's a wary outlook into the future. Microsoft! would be the top destination site, but Google will own search. Without a substantial search engine underlying Yahoo, Microsoft will not have a good response to Google's ability to suck revenues away from the destination sites.

Buying Yahoo puts Microsoft on the path to becoming the leading Internet media company based on a destination site model. But destination sites are splintering as big destination sites are shoved aside for sites created by the user and fed content by providers such as (of course) Google. And solving that problem is an issue that even Microsoft's dollars may not be able to solve. |

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