Microsoft Dampens Yahoo's Social Network Glory

Yahoo's Open Strategy could make the company the weapon Microsoft needs for social network dominance.

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The gross attention financial analysts and the media are paying to Microsoft's offer to acquire Yahoo is detracting attention from arguably one of the most significant announcements the embattled Internet company has made in years.

In announcing YOS (Yahoo Open Strategy) April 24, the company has unveiled its intention to "rewire" Yahoo to be entirely open and is looking to be the champion social network at a time when social media is transcending the way the world communicates and does business online.

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Yahoo wants to mash up its search function, tools and profiles, allowing developers to rework what is essentially a lot of siloed content and contacts-into a more seamless network.

For example, in this network, users will be able to e-mail each other from their Yahoo inbox, post pictures and update their statuses. Moreover, users will be able to add applications to their Yahoo mail, Sports, My Yahoo pages and pretty much anything else on the site.

Think Facebook plus Google Gadget-type apps rolled together into a personalized, super dynamic page. Such an effort, if properly executed, could help Yahoo boost its user base and traffic. Combine that with a successful implementation of the company's forthcoming AMP and Yahoo could sport some significant ad sales growth.

"Yahoo OS, if it became reality, could help the company to become a viable competitor for Google once again in the long term," IDC Analyst Karsten Weide wrote in an April 25 research note.

If this effort succeeds, Yahoo will have broken down the barriers between its 500 million-plus users, allowing them to communicate and collaborate for work and play. Yahoo would then easily be the largest social network in the world, dwarfing MySpace and Facebook combined.

Moreover, it will be completely open. Given Yahoo's recent pledge to support OpenSocial, it can be assumed that Yahoo will do this with the open-source OpenSocial APIs, which allow content built on one social network to run on another OpenSocial-based network.

This is great news for Yahoo users, right? Sure, but you wouldn't know it because all anyone is talking about is Microsoft's vow to take its offer to Yahoo shareholders-that's a shame, because Yahoo is onto something.

If Yahoo unveiled this a year ago, would it have precluded Microsoft from gunning for the company? That's hard to say. It certainly would make Yahoo that much more attractive. However, it also might have enhanced the value of the company, pricing it perhaps not out of Microsoft's range, but more than the $31 per share offer Microsoft is currently willing to pay.

So now we have quite the pickle. Yahoo wants to become a super social network and Microsoft wants to devour Yahoo. So let's take the next leap, which is where Weide and I disagree. Weide suggested the YOS could convince shareholders that Yahoo is plenty valuable as an independent.

"Yahoo will only be able to realize its new 'open' strategy if its stockholders can be convinced by it to not sell out to Microsoft," Weide wrote. "It is a self-fulfilling prophecy: Only if stockholders believe in Yahoo OS will it become reality. If they don't believe it, they will most likely sell to Microsoft. And under Microsoft, the future of Yahoo OS is very much in doubt."

If Microsoft succeeds in purchasing Yahoo in late 2008 or 2009, I believe it will let Yahoo pursue its YOS plan.

Then, if Microsoft successfully integrates the Yahoo user base of Web mail, instant messaging and content users with its own cachet of millions of Live Mail, Live Search and Windows Messenger users, the software giant would have more than 1 billion users, becoming the dominant social network.

Further, if Microsoft leverages the combined search and mobile assets with this super social network, it could seriously challenge Google's online ad supremacy. This wouldn't happen in a year, but more like three to five years. That will be a championship bout for the ages-a punch-counterpunch epic between Google and Microsoft.

Speed and execution will be the key, because while Microsoft is figuring out how to appropriate the Yahoo assets, Google will be innovating new ways to keep ahead.

In the meantime, Steve Ballmer and Co. has yet to declare whether they will go for the Hail Mary or punt on Yahoo. Every minute they wait is another minute Google spends getting ahead.