Why The Yahoo-Microsoft Deal Will Be a Disaster

We've poked fun at Yahoo's efforts to pretend that it's in control of this Microsoft process, and we've argued that the transaction is pretty much a done deal. One thing we want to be clear about, however: Yahoo is smart to search for alternatives, because if the deal proceeds as proposed, it will be a disaster--for both Yahoo and Microsoft. (If you're already persuaded of this, see The Answer. If not, read on.)

Why will Microsoft-Yahoo be a disaster? Three reasons:

1. Pre-Deal Purgatory. 

Even if Yahoo agrees to the deal tomorrow and everything goes smoothly, it will be almost a year before the transaction closes. The regulators won't block the deal, but they'll take a hard look at it--especially in the EU and especially after Google goes on the lobbying warpath to pay Microsoft back for the latter's efforts to block Google-DoubleClick.

A lot will happen in a year, and neither Yahoo nor Google will sit still. Yahoo's strong people will be bombarded with offers, and even with a big pool set aside for retention bonuses, will be foolish not to consider them. Who knows what will happen when the companies merge? Microsoft could immediately whack 30% of Yahoo's workforce. The same anxiety and turnover will infect Microsoft. How can Microsoft's Internet people be sure that Yahoos won't suddenly be put in charge? Microsoft's Internet division already plays second fiddle to Windows and Office. Who's to say the homegrown Internet folks won't be fingered as "redundant"?

Innovation at both companies will also be stifled: Who wants to launch risky new products when they and anyone associated with them might suddenly be eliminated by a new management team? Amid the uncertainty, the most important priority for every employee who wants a senior role in the combined entity will be to figure out who will survive and where the survivors' loyalties lie. Meanwhile, Google will be steaming full-speed ahead.





2.  At Microsoft, the Internet division will always be subservient to the Windows and Office cash cows. 

Steve Ballmer knows which products butter his bread. So does everyone else who works at Microsoft. Steve and Microsoft may also know that, somewhere down the road, Google and "cloud computing" threaten these products, but there's a difference between knowing that a competitor might eventually disrupt your business and actively disrupting it yourself. 

Put differently, there is a fundamental difference between the way Google and Microsoft approach the Internet:

• Google wants to use the Internet to build a huge business (and, in the process, kill Microsoft--a mission that may end up becoming an Ahab-like obsession)
• Microsoft wants to use the Internet to protect its already huge Windows and Office businesses.

One strategy is offensive, the other defensive. At Google, every exciting new idea that undermines Microsoft's core business will be rushed into production. At Microsoft, every exciting new idea that undermines Microsoft's core business will be killed (or, at least, delayed). 

If Microsoft wants a combined Yahoo-MSN to succeed, it has to give it the freedom to destroy Windows and Office. As long as the entity is under the same corporate roof as Windows and Office, this will never happen. (And in that reality lies the secret to a successful merger: Combine the assets, but keep them as a separate company)





3. No company can do everything, and Microsoft is already fighting too many wars.

Once the deal is complete, Microsoft will have 80,000 employees. It will be competing with:

• IBM, Oracle, SAP, Salesforce.com, and dozens of new software-as-a-service providers in enterprise software
• Apple, Sony, Nintendo, Research in Motion in consumer gadgets, gaming, and PC platforms, and
  
• Google, Time Warner, Comcast, AT&T, and others in media, advertising, and technology.

Each of these business requires different skills, relationships, strategies, and expertise. Each faces strong, focused, rich competitors. The difficulty of winning wars on all these fronts at the same time is one reason Microsoft's Internet division has been sucking wind for the past 13 years (the other reason is the one above--it's a small sideline business for Microsoft).

Some argue that Microsoft will do just fine in all these businesses because it will become a new-age GE: a digital conglomerate.  This is wishful thinking. GE is a successful conglomerate because it has been a conglomerate for almost a century--owning and operating different businesses is its corporate DNA.  Microsoft's corporate DNA, meanwhile, is not just a single business but a single product: Windows. Almost everything the company does is designed in some way to leverage the fantastic power of that platform. (Even XBox, which Microsoft has approached brilliantly, is a vehicle for extending the Windows paradigm into the living room).

Microsoft, in other words, doesn't want to be GE. It wants to be the operating system for the digital world. It doesn't want to buy Yahoo because Yahoo is in an exciting business with strong growth potential. It wants to buy Yahoo so Yahoo can help "transform" Microsoft's business--i.e., make it more competitive with Google.

Google is indeed a threat to Microsoft, but so are Oracle, Apple, IBM, RIM, and a host of other companies. Microsoft is right that all these businesses are converging and that is possible that one company will end up capturing the lion's share of the value chain.  But whether or not Microsoft buys Yahoo, Google is in a far better position to become The One than Microsoft.

The Bottom Line:

Google has built its entire business around cloud computing. Microsoft is trying to transform its entire business to avoid being killed by cloud computing.  Yahoo or no Yahoo, the history of business (including Microsoft's) makes it crystal clear who's the favorite to win this war.

See Also: Dear Jerry and Steve...Here's the Answer