Microsoft Hires Lu, Commences Project Granola

Background: Microsoft (MSFT) announced that they have appointed former Yahoo! (YHOO) executive Dr. Qi Lu to head up the Online Services Group and report to CEO Steve Ballmer. Dr. Lu served at Yahoo! for 10 years, where he was recently executive vice president of Engineering for search and advertising. Yusuf Mehdi, the most popular face associated with Microsoft’s efforts to combat Google (GOOG), will serve as head of the Online Services business (announced a few weeks ago) and will report to Dr. Lu. Brian McAndrews, former CEO of aQuantive, and the one speculated to head the group, will exit the company, presumably because he was passed over for the position. He remains as a consultant to Ballmer.

What This Really Means

My sources close to the situation have told me that after the failed acquisition of Yahoo!, Microsoft is “seriously” pursuing a strategy to grow organically, both the display and online search businesses, with particular emphasis on online search. They have code named their strategy Project Granola, which has already been quoted in the press.

With the hire of a key veteran of Yahoo!’s search business and someone with a keen knowledge of how Yahoo! revamped search through Panama, Microsoft is hoping to use Dr. Lu’s knowledge to now revamp their own search business. So expect announcements out of Microsoft on this in the future. They believe that time is on their side, given the current environment. I do not necessarily disagree with that assumption.

Microsoft has essentially moved on for now and is not interested in any transaction with Yahoo!, whether it be a full acquisition or a purchase of the search business. Pundits interpreting the hiring of Dr. Lu as a sign of a pending cooperation with Yahoo!, are misguided. All of the attention in the press about a transaction for the search business is pure noise for now. I believe so even though Ballmer said he remains interested in some form of a transaction and that some have indicated that Dr. Lu pushed for a transaction with Microsoft when he was at Yahoo!. Thus, investors buying Yahoo! solely for hopes of a transaction could be holding on to dead money for sometime. [Admittedly, the stock could rise due to the company’s own performance.]

Will Microsoft succeed in catching up to Google? I wouldn’t bet on it but I wouldn’t bet against it either. I am taking a neutral view. Yahoo! did narrow the monetization gap with Google with their revamped search engine, so the assumption can be made that with Dr. Lu, Microsoft can do the same. But the problem for both Yahoo! and Microsoft is “Volume”. Google has it and they do not. So my longer-term bet is that some form of cooperation is in the cards for Yahoo! and Microsoft. But near-term don’t expect anything but pure noise out of all.

Comments

[icbmcaptain:]

Great! Now we have an anonymous media tech analyst talking to "my (anonymous) sources" giving their commentary on the situation. Be careful "Seeking Alpha", you're well on your way to becoming part of the mainstream media! That's not a compliment.

2008 Dec 07 10:12 AM

[tillman:]

There is a fundamental flaw in the logic. Dr. Lu worked on Panama project - which isn't as big success due to low volume of searches. Microsoft on the other hand has less than half volume than Yahoo. It will take them years to even catch up to Yahoo let alone Google. The only way this would make sense is for Microsoft to take over yahoo search and reaching a point in market share that would make any improvements in monetizing worth a dime. No matter what the so called pundits say there is no way Microsoft can beat Google in search unless it acquires Yahoo!

2008 Dec 07 12:12 PM

[steveballmer:]

I never intended to pay $47.5 billion for Yahoo. We went through that entire excersise in order to kill it, watch the stock tank, then snap up the entire company in a fire sale. However, because of the economic implosion the stock has fallen further than even we expected. I believe it can go even further, so now we are floating rumors that we want to buy at $20 B. When this is commonly accepted, I will crush all expectations in some grand announcement of my continued disinterest. Their stock will plummet like a rock again and we will acquire the entire company, lock, stock and barrel for about $10 billion.
It's called business people, it's not evil, nasty, ruthless .... it's simply the way things are done!

Dang! I am goooood!

2008 Dec 07 01:00 PM

[Perki:]

I think this is a confirmation they remain committed to search, not a major change in strategy.

Microsoft has had a vacuum at the top of their search division for some time, this is just simply filling that spot with someone qualified for a change; nothing more.

As far as getting the good Doctor because of his involvement with project Panama -- umm, no. Project Panama is a failure which is why YHOO is in trouble with no where to go but down.

This move also highlights the fact that acquiring Yahoo would be acquiring a hollow shell. You can "rent" the main asset, search marketing share, without assuming the overhead, through management agreements.

2008 Dec 07 03:09 PM

[Dew Point P...:]

Do you think your "anonymous sources" are some how more credible than Steve Ballmer himself ,or do you just not read the news. You state that, Microsoft has moved on for now and is essentially not interested in any deal with Yahoo! Meanwhile Friday Ballmer said in an interview with WSJ that he wants a quick deal.

2008 Dec 07 03:30 PM

[Mr. Anonymo...:]

Just a horrible analysis. Search 'MSFT Yahoo Acquisition', Copy, Paste, Search....

2008 Dec 08 02:01 AM

[DDD:]

Amen, to comment on horrible analysis.... MSFT can never dethrone GOOG on its own. Otherwise, it would have already done so as cash has never been a problem for MSFT.

2008 Dec 08 10:37 AM

[Forex:]

So where is the deal?

2008 Dec 12 04:46 PM