Yahoo to acquire Six Apart?

Includes: GOOG, MSFT, YHOO
by: David Jackson

Six Apart, the owner of hosted blogging service TypePad and publisher of blogging software Movable Type, just acquired LiveJournal. Within six months Six Apart itself will be acquired by Yahoo!.

Here's why.

1. Blogs are the next market for pay-per-click ads.

Google and Yahoo!'s Overture division have generated stunning profits from pay-per-click (NYSE:PPC) keyword ads on search results. But now they face a problem. Demand for PPC ads is growing faster than supply, which is determined by the growth in the number of searches. Demand for the ads is growing rapidly because advertisers can track the return on investment from PPC ads in real-time, since they can monitor conversion rates and  profitability per sale. So when an ad is profitable, advertisers bid for more ads. In some cases, advertisers' budgets are larger than they originally realized, because the profit from the ads is almost instantaneous and can be recycled into paying for more ads.

As a result, prices for PPC ads are rising. Google and Yahoo! like that, but they realize they could make a lot more money if the opportunity for PPC ads wasn't limited to search.

So Google came up with AdSense, which uses contextual matching to place PPC ads on content-based Web sites. Genius! Now the whole content-Web is suitable for PPC ads. Doesn't matter that Google splits the ad revenues with the Web site owners; Google's effective gross margin (net revenue minus cost) is still stellar. Overture followed, though it targeted large Web publishers (The Wall Street Journal) instead of automating the sign-up process to make it suitable for millions of small operators as Google did. (Perhaps Yahoo! underestimated the length of the long tail in Web publishing.)

Now ask yourself this. What is the fastest area of growth in Web content? Blogs. But it's important not to make an error here. Blogging services, whether hosted or downloaded, are not just about blogs as we know them now - personal online journals. They're about something broader: cutting the cost of, and simplifying the process of publishing content to the Web.

Because the blogging platforms are the largest generators of new Web content, they are a natural target for the providers of PPC ads. Many bloggers dislike the notion of advertising on blogs, but they're in for a shock. Blogger, TypePad, LiveJournal and the other blogging platforms will make it much easier for Web publishers to profit from ads. They'll build contextual ads into Web site templates, and use the publishers' sign-up information to open simultaneous advertising accounts.

Skeptical? Don't be. TypePad has already integrated the associates program into its TypeLists, and announced in November that it was partnering with contextual ad provider Kanoodle. It's only a matter of time before Google does the same with Blogger.

This is why it's so remarkable that Yahoo! has no blogging platform.
Yahoo! owns Overture, the main competitor to Google's keyword ad
business. Ad inventory is in short supply, Web content is the greatest source of untapped inventory, and blogs are the fastest growing area of Web content.  Google owns Blogger, Microsoft quietly announced recently that its blogging platform, MSN Spaces, just passed the 1.5 million user mark, and Yahoo! has... nothing.

That's the first reason why Yahoo! will acquire Six Apart. Now for the second.

2. Web publishing will be a necessary component of an integrated
set of Web-based
personal tools.

Google, MSN and Yahoo! are competing for users. They know that the best product generates user-dependency, is sticky, and attracts a lot of user time. Yahoo! and MSN discovered that Web-based email fits that description, and so does instant messaging. Yahoo! hopes that a page of RSS-driven content will do the same thing. MSN and Google will probably roll-out their own Web-based RSS-aggregators soon.

But here's the truth: the user-dependent, sticky, time-consuming application that these companies are driving towards isn't one of these, it's all of them together: an integrated suite of Web-based personal tools. It will encompass Web email, instant messaging, an address book, a page of
RSS-driven content like My Yahoo!, a set of online bookmarks like, perhaps online management of music or other content, and... a blog for photo sharing and one-to-many communication.
These tools will be tied together with social networking links. Your
"about you" page, for example, could be automatically networked (with
the right permissions) for job hunting and dating.

If there's any doubt about Microsoft thinking this way, here's a comment from Bill Gates' recent Gizmodo interview:

I think blogging is super-important and we've got to do a lot more software. The phenomena for us is we've got in beta this MSN Spaces thing, and it lets you leverage everything you do around Messenger—that's your buddy lists and those relationships—to set up blogs, and who has access, and who gets notified.

What does Yahoo! have in this collection of tools? Yahoo! Mail, My
Yahoo!, and Yahoo! instant messenger. But no blogs. Quick comparison:
Google has Gmail and Blogger, but no IM and no equivalent to My Yahoo!
(yet). Microsoft has Hotmail, MSN Spaces, MSN Messenger, but no equivalent
to My Yahoo! (yet).  So, as these companies assemble the complete
bundle of integrated personal Web tools, the social networking sites
will be acquired, will be acquired, and... Six Apart will be acquired.

Why won't Yahoo! just build its own blogging platform? First, because the serious blogs with the most readers - and thus the greatest PPC ad potential - have already been built with Blogger, TypePad or Movable Type. And second, because Yahoo! is far behind Google and Microsoft, and acquiring Six Apart would vault it to the front.

With its recently announced
acquisition of  LiveJournal, Six Apart has 6.5 million users. All of them are likely lost to Overture ads and
potentially lost to Yahoo!'s future bundle of personal Web tools.

Unless, of course, Yahoo! acquires Six Apart.

One further thought:
Morgan Stanley analyst Mary Meeker published a thought-provoking and well-written report about blogs and RSS (PDF here). She argued that Yahoo! will be the big winner from syndicated content, making money wrapping ads around aggregated feeds or splitting ad revenue with small publishers.

I questioned her bullishness on Yahoo! on two grounds. First, Yahoo!'s market position in RSS aggregation isn't assured. (Recent data actually suggest that My Yahoo! has far smaller market share than Bloglines.) And second, niche Web sites will in fact take readers
and advertising dollars from broader content aggregators like Yahoo!.
(I'd call this the competitive impact of the long tail.)

This post now highlights another weakness in Yahoo!'s competitive position: Yahoo! seems to have underestimated the commercial importance of blogs, trails Google and MSN in the blogging market, and will end up being forced to acquire Six Apart in the near future for a handsome sum.

Lots of smart people (including Robin Good, Martin Tobias, John Battelle, Fred Wilson, Jeremy Zawodny, John Palfrey, Tony Perkins, Susan Mernit, Steve Rubel, and Michael Seneadza) complimented Mary's report. Perhaps they focused on her analysis of blogs and RSS and overlooked her specific claim about Yahoo!. That's OK: most were writing from a new media perspective, not an investment perspective.

But for investors in YHOO, getting this wrong could be costly.