Micro-Hoo: The Browser Wars, Take 2

Includes: GOOG, MSFT, YHOO
by: Michael Eisenberg

I have waited to weigh in on Micro-HOO and watched analysts take a swing on the likelihood the deal will happen. I am more interested in what motivated MSFT to do this deal. Henry Blodget has an interesting post on what he calls "Microsoft's Colossal Mistake."

The Yahoo acquisition is also cursed because it is predicated on a colossal strategic mistake: Microsoft's misguided conviction that needs to be in the advertising business.

Microsoft wants to buy Yahoo in part because it wants to develop a global "cloud computing" platform....Cloud computing appears to be a classic disruptive technology, one that will likely end up maiming or killing incumbents like Microsoft. That said, buying Yahoo is not the cheapest or smartest way for Microsoft to break into the cloud computing game. More importantly, it also commits Microsoft even more deeply to a business--ad-supported Internet media--that it simply doesn't need to be in.....

Microsoft's Misconception: "Cloud Computing" = Software Supported By Advertising

The problem is the way Microsoft has always framed the "cloud computing" transition:
  • paid desktop software licenses giving way to
  • free web-based software supported by advertising.
This framing is wrong. It has also led Microsoft to believe it has no choice but to compete with Google in search and to buy Yahoo, aQuantive, et al, to beef up its advertising platform.

I agree with Blodget's assertion that Microsoft has got this all wrong but I think the mistake is more historical and is not necessarily predicated on Cloud computing. Yahoo, as Blodget says correctly, is not the obvious choice if you want to get into cloud computing. MSFT could have bought Zimbra, It could buy Zoho or a host of others.

Microsoft, in my opinion, has a tendency to look at others' mistakes and then chase yesterday. So, in the mid-90s it observed that Netscape got an early start on the browser. Microsoft concluded that it could not lose the software business and relentlessly pursued Netscape in the first browser war and ultimately triumphed. That made sense since the browser was desktop software, which is a category Microsoft has owned. I believe, though, that Microsoft also keenly observed that Netscape missed the disruptive boat, choosing to compete in software (servers and browsers which is MSFT's home turf) rather than realizing that what was behind the window was more important. To remind you, Netscape put good old Yahoo behind that window and let Yahoo build its business on Netscape's users.

Microsoft, determined not to make the same mistake, ventured out of its core competency and built MSN to put behind its own browser, IE. But MSN has never been a huge player online and not a well known brand. So Microsoft concludes now, ten years later, that the real problem is that they did not have a leading online brand or set of services behind the browser and ventures out to buy one, for $40Bn. In fact, Ballmer tipped his hand on this by saying that the Yahoo brand will persist. Ballmer assumes that by pairing the market share browser leader with a leading "portal" he will win users over to the platform, and by putting the research organizations together and getting scale on the ad network he will improve monetization.

Message to Steve Ballmer - That is so 90s! Fast forward to today: Users are opting around the browser. They are searching via toolbars that can come from any site such as the toolbars from Conduit (full disclosure: Benchmark is invested in Conduit). In fact, I would venture to say that Google and Yahoo's toolbar business is well over $2Bn of revenue. They are turning off browser defaults and opting for other browsers such as Firefox and safari that have more built in choices and customization options.

In addition, the widgetization of the web is spreading entry points away from the browser and away from portals. Microsoft is doubling down on centralization here by coupling the browser and the portal whereas the web is atomizing and decentralizing at a rapid rate. This is yesterday's playbook and is counter trend. Google, while a start page for many, is the epitome of decentralization, spraying users to web pages everywhere and leveraging the power of links. Microsoft is doing what Microsoft does best and perhaps the only thing it knows how to do: pushing for centralization, portaling and tight coupling, and that is doomed for failure.

Photo: from Valleywag contest.

For a lighter look at the MicroHoo goings-on, see this video from the folks at 5Min.