Handicapping the YHOO-MSFT Scenarios

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I disagree that search is the only thing that matters. Even from a dollars perspective, search is not the only thing that generates large enough revenues - in the US, the search market (and this typically includes contextual) doesn't seem to be really that much bigger than the display market. While Google moving aggressively into display, if we use the similar logic in judging based on today's net dollars share (vs. Yahoo and Microsoft combined), then why would there be anti-trust concerns for the GOOG-DCLK deal? Hence, I believe that we should look into the future potential for monetizing the world's largest email/messaging networks as the basis and not what it does today. It is hard for me to believe that the enormous scale of users, user attention, and user data of a combined MSN-Yahoo entity can't capture much more ad dollars in non-search areas a few years from now. In my opinion, the argument that "only search matters" is somewhat myopic and short-sighted. If we believe that MSFT's main reason for buying Yahoo is search and search advertising, then we're all kidding ourselves - that ain't worth $31/share.

In terms of IM, your argument is focused on the actual IM software (or client) and not the IM network. And, I'm sorry, but in instant messaging - AIM and ICQ are both owned by AOL while Meebo/other smaller products all primarily rely on people's existing IM networks/accounts. Gtalk is nowhere really. Skype is a valid network but seems to co-exist with the other IM networks - hence, not necessarily a true substitute. By my count, there are only 4 major IM networks - AIM/ICQ, MS Messenger, Y!M, and (maybe) Skype. Further, there really isn't an open-standard yet for connecting IM networks yet - so no interoperability. Therefore, it does matter how many competing IM networks are in the market when talking about healthy competition.

I absolutely agree that Google is not in a position to bid for Yahoo, for similar reasons that I'm arguing that the YHOO-MSFT deal deserves anti-trust attention. At the end of the day, one has to look at control of the various platforms that are emerging on the Web. MSFT-YHOO gains significant share and control of the largest messaging/communications and display advertising networks worldwide (not to mention other areas). This is a battle for the future of computing - and the number of major (at-scale) players who can participate will be down to two with this deal.

I’ll try not to be too long-winded* because this business is where your expertise is and these items I’ll list will either make sense or you’ll correct me quickly:

1 - Supposedly MSFT has the platforms to take Yahoo’s non-search properties to scale more efficiently.
*You can buy all the scale you want at the bank. And in fact it appears MSFT will be using their Visa card for just that, right? You might respond it’s only for paying for Yahoo, but it’s all the same pot.

2 – Google would run into anti-competitive complaints with Yahoo’s search business.
*So what?… distribute it reasonable to a third party. It’s not like Google is too worried about search competition from anyone other than MSFT, and how much do you think “Live Search” scares them? Does Live Search run chills up your spine? If you were spending 44 Big for Yahoo to build search competitiveness, wouldn’t you have already come up with something more exciting and compelling for a name other than “Live Search” over these many years of competition? “Google” and “Yahoo” are action verbs… “Live Search” is a platonic slop bucket phrase. Who do you imagine would better compete for the share denied to MSFT?

3 – You and I agree that Google might make a disingenuous bid just to slow down MSFT.
*However, you suggest they might not elect to be heavy-handed enough to do it. You mean as heavy-handed as MSFT calling Yang out in the street for a duel in public?

4 – MSFT claims it would gain engineering expertise.
*No doubt. So would Google, probably the type to give them good assistance in developing the open source apps that must have MSFT getting more and more worried about.

5 – Google might run the risk of missing financing or overbidding.
*I doubt it, but in the meantime they’d drive the price to the moon for MSFT, and nothing says they’d not STILL be able to complain about anti-competitive matters in the regulatory process if they lost (they and MSFT are very differently organized), slowing and distracting both Yahoo and MSFT. At that point, were I Google, I’d offer to pay the bonuses Yahoo would ordinarily have paid engineering and sales staff and recruit them heavily. Higher bids from here by MSFT continue to raise the specter of dilution and work inversely to their purpose. You see, MSFT assumes Yang is over a barrel and he’d be over more of one were MSFT a private concern, but MSFT is over a barrel too, put there by their own maneuvering and shareholders turning more fickle by the day.

Interesting. I just don't see it, though. I understand Schmidt's deep-seated fear of Microsoft (Novell, etc.), but I just can't believe he really thinks Yahoo would suddenly enable Microsoft to do what it did in PCs. And if the situation isn't dire, I don't see them going through the hell of it...

Let 'em scream bloody murder. MSFT could never be absolutely sure that Google couldn't pull it off, no more than anyone can be absolutely sure MSFT could pull it off... now.

Henry, when you're called out in the street, you reach for your gun and you launch little deadly spirals of hot lead winging their ways to find deep flesh... can't afford to be in the street shot dead on a called strike 3.

That ratchets the bid up... up... and away, and within reason Google would just follow it up, probably with a stock deal... probably send Google stock up $100 just on the news, just on the anti-MSFT matter created in the Universe, like when matter meets anti-Matter and goes Poof!

There may be a half-dozen or more creative ways for Google to swing the financing and the regulatory approval. I mean... which you think they'd enjoy the most? Putting lead in deep Soft flesh or watching MSFT co-opt 70-80% or more of the Internet landscape?

Henry said:

[...] as long as AIM, ICQ, Gmail, Meebo, and Skype, et al, are out there, there are plenty of alternatives, so there's no risk that consumers will only have one choice [...]

By that argument, Google could buy Yahoo and point to Ask, Mahalo, et al. as being "competitors." (I know, silly...)

I'll agree on the limited monetization potential of IM (for now), but e-mail does draw revenue; it's a supreme example of targeted advertising based on dynamic content, with attractive CTRs. Your list of alternatives only included one free e-mail provider: Gmail. As My2Cents pointed out, it's almost impossible to migrate e-mail providers. It's like changing your phone number: doable, but so much of a pain that it usually isn't worth it. I would wish (but not expect) certain interoperability mandates be in place as a condition of the acquisition.

Yahoo monetizes mail very poorly, as they do not target their ads to the content of the message nor the behavior of the user. Their loss.

Google won't bid because the regulators really would have cause to block that deal (90% of search, top two global properties, etc.). Also, customers, privacy advocates, and consumer watchdog groups who already think the company is too powerful would scream bloody murder. Look at the hassle and time it has taken Google to make the tiny tuck-in acquisition known as DoubleClick. Google's not going to go through that again just to try to keep Yahoo away from Microsoft.

(It's true that they could bid knowing that they'd never be allowed to actually buy the company just to delay Microsoft, but that seems a bit heavy-handed.)

Search isn't the only product worth considering vis a vis market control, but it's the only one that matters. No one makes much money on email or IM. Also, as long as AIM, ICQ, Gmail, Meebo, and Skype, et al, are out there, there are plenty of alternatives, so there's no risk that consumers will only have one choice.

Whassamatta?

No reply?

#4 is a much higher probability than people have pegged it, provided that the regulators are willing to look beyond search. How large would be the combined market reach of Hotmail and Yahoo Mail compared to Gmail?

There's a reason Ballmer keeps shouting “Search! Search! Search!” He's not interested in Yahoo's search capabilities at all; but if he keeps everyone focused on that, nobody will notice how the combined companies dominate other Internet markets like e-mail. Throw in the control Microsoft has over intranet e-mail through Exchange, and things begin to look dire for platform-independent communications.

"If regulators block this deal, the regulators should be fired." Ugh, harsh or just plain short-term oriented.

I understand the whole argument about Google's dominance in search and search dollars - but we have to keep in mind that consumer barriers to move to another search product is low. Yes, there are benefits to getting the lion share of queries and clicks but the low level of 'lock in' for consumers is debatable at worst. If we believe that scale alone matters in search, then what chance do all the new search start-ups have? Nada? If so, then why are there continued investments in this area - VCs can't all be that "blind". Seriously, what does it take for the conversation to also focus around the combination of the world's largest mail and messaging providers? Isn't anti-trust partly about consumer choice? What choice do consumers have left if Yahoo Mail/Y!M and Hotmail/MS Messenger become one product offering? Unlike search, consumers will a more difficult time moving from one mail product to another - at least at its current iteration.

Now the ad dollar market share argument is just ludicrous in my view. If you believe that brand dollars have yet to move into online and that it will do so in the next few years, which I believe to be the case, then it would seem that the combination of the two largest display ad networks in the world would also be cause for concern down the line.

This is almost like telling Apple to combine with Sun back when Microsoft dominated (still kinda dominates) the OS market. But what did Apple do? It innovated and, over time, "made" the market and consumers better off.

If Microsoft's past behavior (I'm talking 2000 to 2003 period) with its products (IE, Hotmail) is any indication, it's almost a guarantee that there would be less competition and less innovation in the market post an acquisition of Yahoo by Microsoft.

So tell me SAI, why the sole focus on search and current share of online ad dollars? A bit short-term oriented no?

Okay, Henry... Let's pull you out.

Why wouldn't Google bid?

Beware, I'll debate you vigorously.

I agree with the assessment; no one can extract the same amount of value out of Yahoo! as Microsoft, thus no one is going to be willing to pay the same premium that Microsoft will, even if they have the ability which is also unlikely.

It's just like News Corp's WSJ takeover, just a different sector.

I would agree with SAI's analysis and add a few point.

1. Buying YHOO gives you a $31.00 put written by one of the strongest financial entities in the world. I would argue that this is very attractive in today's market.

2. You also have a call on .95 shares of MSFT that is in the money at $32.63. This allows you to participate if the market comes roaring back. I believe MSFT is oversold here given the strength of their recent quarter and their defensive characteristics so the call is attractive to me.

3. There is no arbitrage opportunity unless MSFT trades above $32.63. That means that selloffs are more likely to occur and they will be of a greater magnitude than a typical merger siutation.

4. I would not expect the bid to be raised because of the opportunity to take MSFT shares. The opportunity for a takeout price greater than $31.00 already exists.

Thanks