What will happen with Microsoft and Yahoo?

It seems like the Yahoo and Microsoft saga will never end!  So, what’s the end game?  Let’s look at the possible outcomes.  Since some of our engineers at Spock.com and myself are former Microsoft employees and many people on our search team are former Yahoo folks, I think we have a pretty good idea of what might happen if some scenarios play out.  Plus, being in the heart of silicon valley, we hear from all the experts.

Option 1 – No deal happens at all

Yang and company win the proxy fight against Carl Ichan and decide to stick it out alone.  They don’t sell their search business or the entire company to Microsoft.

If you looked at the latest hitwise data, Google accounted for 69.17 percent of all U.S. searches in the four weeks ending June 28, 2008.  Yahoo! Search, MSN Search and Ask.com each received 19.62, 5.46 and 4.17 percent respectively.  Yahoo! Search, MSN Search and Ask.com each received 19.62, 5.46 and 4.17 percent respectively.  Google reached an all-time high – up 8 percent year-over-year. In short, they are not only dominating search, they are gaining market share.

In the U.K. market, Google search properties (Google.co.uk and Google.com) accounted for 87 percent of all UK searches in June 2008 representing a 10 percent increase compared to June 2007.

In the Australia market, Google search accounted for 88 percent of all AU searches in June 2008 representing a 12 percent increase compared to June 2007.

If no deal happens, I see Google capturing more market share over the next few years.  The reason – they just have a much better product. There is no possible debate on this one. The Google search engine is just a much better search engine then any other general search engine out there.  They crawl the web better and faster then anyone else, they mine data and organize information better then anyone, and they display information in a better manner then any other search engine.   On top of that, they have the best ad network out here.  Their ad networks is much easier to use (as both a publisher and advertiser) then Yahoo’s or Microsoft’s.   It’s that combination of great search and a powerful ad network that makes them so hard to beat. It’s very similar to what Microsoft has with Windows and Office. The combination is a killer app.

Microsoft has the desire to win search and they have the money. They don’t have the right team or platform.  If they did, Microsoft would not want to buy Yahoo.

Yahoo, from the opinion of many in the valley (including their employees), no longer has the desire or capital to win search.  Just look at their recent deal with Google.  The smart Yahoo engineers are leaving the company for a good reason. They do not see a commitment by management to win search.   If Yahoo wants to be a pure content site, that’s fine, they do a good job with content. But don’t expect several hundred PhD’s to stick around.  Plus, Yahoo sees all that money going out the door to have thousands of servers crawling the web, having thousands of highly paid search engineers, and a very poorly managed search Ad Network.  Let’s face it, if I were a shareholder, I would want them to dump search or commit to it 100%.  Stop playing the middle game.

In order to have any shot at Google in the near term, you need the combination of Microsoft desire and assets along with the Yahoo team and as platform.  Otherwise, it’s smooth sailing for Google.   In this scenario, in the long-term, I see:

Microsoft acquiring a lot of vertical search companies and technology plays to compete in search.  Their strategy will be to not compete with Google head on, but rather go after specific verticals like travel, people, pictures, maps, etc.   If they can embed these vertical searches into existing product lines and online properties, they could slowly inch up on market share.

Yahoo on the other hand will have a very hard time competing with Google.  They eventually might give up on search and outsource their search advertising and technology to Google (probably won’t pass muster with the DOJ), so they will come up with a creative loophole like the current deal, where they could use the Google ad network and maybe parts of Google technology.  Either way, I don’t see Yahoo winning on search by themselves.  Given the recent public spats with Yahoo and Microsoft, I really do not see Yang reaching out to Ballmer for help.

Option 2 – Yahoo sells their search business to Microsft

This is the best possible outcome for the industry.  Yahoo remains as a separate company and Yang gets to keep running it, Ballmer gets the team and platform he needs, and Google gets some healthy competition.

Yahoo selling their search technology, team, and search ad network to Microsoft makes sense for a lot of reasons.

1. Steve Ballmer would now have a team that is capable of winning search.  He would also get an ad network that has some scale.  Especially if Yahoo allows Microsoft to power their search technology and ads, Ballmer would really have a fighting chance.  He can go out to the market even harder to convince advertisers to use his network over Googles.   At the end of the day, advertisers don’t want to be at the mercy of the Google Ad Network.  More choice is a good thing.

2. Yahoo can concentrate on content and socail media. Let’s face it, Yahoo is a great property and an Internet icon.  They do content really, really well.  Much better then anyone else. So why not focus on what you do best.  I would much rather go to Yahoo for news and gossip then Google or MSN.   Plus, without the multi-billion dollar overhead of search, Yahoo can go out and maybe acquire social media sites like MySpace, Facebook, or something smaller like Digg.  These properties fit with what Yahoo does really well – Deliver quality content, have millions of signed up users, and generate a lot of page views.  Search is the exact opposite – no sign-ups, no page views, and no content.    Yahoo could corner the market for high end display advertising if it jut focused on quality content and high quality social media.

3.  Google would have to keep innovating.  This is a good thing.  I have seen too many times a good product go bad once the company stopped focusing on it.  Remember how good IE was when it was going after Netscape, and how bad it became once it had no competition.  The same could happen to Google if it becomes relaxed.  I would enjoy nothing more as a consumer to have two really good search engines and ad networks to rely upon for my daily needs.

Option 3 – Yahoo sells itself wholesale to Microsft

Here a interesting bit of gossip in the valley. Google would really, really like it if Microsoft bought Yahoo. Naturally, they won’t say that to the press of DOJ.  To the outside, they will work like crazy to delay the deal as long as possible under the guise of anti-trust. Why? So that while Microsoft and Yahoo are stuck in limbo trying to merge and fight the DOJ, Google would have more time to capture even more market share.  And even when they do merge, trying to merge two completely different cultures and a ton of different online properties would be a nightmare.  When was the last time you saw a merger of this scale work?  I have not ever.  Google knows that a complete acquition would give them several years of no competition while Yahoo and Microsoft “try” to integrate with each other and set up a strategy on how to compete.

In short, a compete sale would basically be the end of Yahoo, cause Steve Ballmer a lot of sleepless nights as he tries to integrate them together and give Google clear sailing.

Now you can see why Ballmer is not as excited about exploring a complete purchase of Yahoo. The more time he has had to think about it, the more he realizes that it might be in his best interest to just buy the search business. Plus, given the proxy battle going on now, and how Ballmer wants to kick out Yang from Yahoo, I don’t think that Ballmer and Yang will be playing golf with each other anytime soon.

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