Microsoft Joining Yahoo: Not As Bad As Some Think

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Includes: AABA, GOOG, MSFT
by: Duncan Riley

The 'Microsoft is evil' meme is alive and well this week as many digest Microsoft’s $44.6 billion takeover offer for Yahoo. We have Flickr users protesting, talk of Yahoo teaming up with Google to block Microsoft’s bid, and general Microsoft is bad sentiment everywhere, even from Google itself. While Microsoft acquiring Yahoo may not provide the ultimate in happy endings to many, it’s really not as bad as some would have you believe.

Google is Afraid.

Google’s response to the acquisition over the weekend was amazing in its veracity. Google and Microsoft have never been friends, but for Google to come out and attack the acquisition as it did can only mean one thing: Google is afraid, and that’s a very good thing. Internally Google believes that a combined Microsoft/ Yahoo will provide real competition to its dominant market position in search and text advertising, the very same position it has depended on to build its until recently huge share price and market cap. Google can preach about open access and open markets all it wants, but Google’s idea of open is only where users access it from one of its many web properties.

More Competition

One argument against the acquisition is that it lessens competition. While in terms of major players it does, a combined Microsoft/ Yahoo will actually increase competition in spaces where Google is dominant, and in some countries all but a monopolist provider. Scale is the key here: Google has it, and Yahoo and Microsoft need more of it. The combined Microsoft/ Yahoo would still have less than half of Google’s market share in text ads for example, but the combined companies would be able to provide a much more appealing product in terms of reach when competing against Google, ie: the increased reach would become more appealing to ad buyers looking to maximize their exposure.

A Stronger Tail

One argument against the deal is that there will be less opportunities for startups to be bought out with Yahoo out of the picture. That is true, but only in the short term. There always has to be a Number 3 player and positions below that, and with Microsoft/ Yahoo coming in at second, the space is now there for smaller players to step into this place. Ask comes to mind, but there’s no reason why we couldn’t see newer players step up. Essentially there will be now one less big player to compete with. The strengthening of smaller players who want to break into the top tier may well see increased flows and acquisitions. In lessening numerical competition at the top, it creates further opportunities below. This naturally rests on the presumption that there won’t be a duopoly in areas such as search, but this is unlikely: there has always been smaller players, always has been, always will be, and the dream of being the next Google will continue to live on.

Yahoo Lives On

Microsoft will actually be a great boost for the Yahoo brand and its many services. The alternatives are nearly bleak in comparison: a hedge fund or similar investment would gut Yahoo to a core rump of (hopefully profitable) services, and sell off areas such as Yahoo News. Google as a partner (either in ads or the unlikely scenario as an investor) would leave Yahoo doomed to be forever a second class player to Google. One of Yahoo’s biggest strengths is still its brand, and Microsoft will work tirelessly towards building that Yahoo brand back to its glory days as the front page of the internet. That goes for the sub-brands as well: Flickr will likely replace Microsoft’s photo sharing suite for example.

Better Service

Someone wrote in the last couple of days the days of building the best product and expecting people to use it has passed, and that’s the problem with Microsoft’s online endeavors today in the age of Google dominance. Microsoft has some great internet products; from Popfly and Silverlight, through to a solid ad platform (that is powering Digg and Facebook) and decent search. A combined Microsoft/Yahoo would offer the best from both companies in what in theory would be a better all over package. Some may argue that getting to this stage might be difficult, but even Wired notes that merging the two corporate cultures wouldn’t be that hard. Ultimately to compete with Google you must have a strong across the board multi-faceted package, and Microsoft/Yahoo would have just that.

Conclusion

None of this is meant as Google bashing. Google has done much good and as Google loves to argue, people choose to use Google - nobody is forced to use their services. However, markets in which one company dominates usually end up seeing stagnation and/or inefficient pricing and service in the long term. We need a combined Microsoft/Yahoo if only to keep Google on its toes, to keep Google innovating and providing the best service that it can, to keep Google honest.