Impact of Microsoft-Yahoo Merger on On-Demand Services

Includes: AABA, MSFT
by: Jeffrey M. Kaplan

Microsoft's proposed acquisition of Yahoo has gained plenty of attention because of its blockbuster pricetag and obvious attempt to blunt Google's success in the online search advertising business.

 However, I think the acquisition also has significant implications for the future of on-demand services. Yahoo's popular portal will certainly be a great new channel to market for Microsoft's on-demand games and Zune entertainment initiatives.

 I've also been saying for the past two years that Yahoo and other major online outlets will become the new channels to market for Software-as-a-Service (SaaS) solutions and managed services. This is because many corporate customers are gaining confidence in SaaS and managed services as a viable alternative to traditional on-premise products result of their overall comfort with consumer-oriented on-demand services like Amazon, eBay, YouTube and iTunes. This consumer to corporate buyer crossover makes Yahoo an appealling outlet for on-demand business services.

 Yahoo has been offering services to small businesses for a number of years that help them "Get Online", "Sell Online" and "Market Online". While these services only include simple hosting and email today, they could easily be expanded to include a broad array of SaaS business applications and a broader set of managed services powered by Microsoft and its ISV partners.

 Leveraging the Yahoo portal as a channel to market for Microsoft's "software plus services" solutions and partner offerings built on Microsoft's platform would give them greater visibility to a broader audience of potential customers.

 However, this assumes two things:

  1. Microsoft has to successfully acquire and integrate Yahoo into its corporate structure and culture. Although no definitive data exists, most studies suggest that 50-80% of corporate acquisitions and mergers fail to achieve their original business objectives. This is especially true with mega-deals that place big bets on producing a strategic impact for the companies involved and more often create a major disruption in their operations.
  2. Microsoft has to convert its "software plus services" strategy into a real portfolio of competitive offerings. Although Microsoft can make a compelling case for customers extending the functionality of its current products via web-oriented extensions, a growing proportion of businesses are looking for true web-based solutions that eliminate the hassles and inherent shortcomings of premised-based applications. Microsoft's current strategies and solutions do not recognize these changing attitudes or satisfy customers raising expectations.

Unless Microsoft can overcome these challenges, it will not be able to fully capitalize on the Yahoo acquisition.