Microsoft's (NASDAQ:MSFT) grab for Yahoo! (YHOO) isn't so much about beating Google (NASDAQ:GOOG) in search-advertising. It's more about beating Google to the online distribution of desktop applications. And according to Professor Michael Cusumano of the MIT Sloan School it's a bad move: "Rather than acquire Yahoo, Microsoft should pursue SAP (NYSE:SAP)." This quote appeared in an article by Professor Randall Stross of San Jose State University. Professor Stross, who also edits the Digital Domain in The New York Times concludes that:
A few dozen well-paying Fortune 500 customers may actually be more valuable than tens of millions of Web e-mail "customers" who pay nothing for the service and whose attention is not highly valued by online advertisers.
His thought reinforces the idea in Yahoo's Audacious Option that Yahoo and Adobe should join forces to challenge Microsoft in the battle for desktop advertising. I first became aware of potential for desktop advertising on February 12, 2009 when I read Kevin Maney's article A Tangible Reason Microsoft Needs Yahoo when he asked:
Want a glimpse of Microsoft's future without some radical shift like buying Yahoo? Take a look at this piece entitled Forget Word: Thirteen Online Word Processors.
But buying Yahoo won't stop Google and the others from attacking its desktop franchise from all sides.
Near the top of Kevin Maney's list was a short description of Adobe's (NASDAQ:ADBE) Buzzword. I'm writing this article in that online application right now. Here's a screen shot of my monitor as I write [click all images to enlarge]:
Look at all that gray space to the right of the document and in the top navigation bar after the Help button. Now imagine monetizing Yahoo's 500 million eyeballs with these now empty spaces around Buzzword and other ODP's (online document processors) coming down their pike. This, coupled with Adobe's history of attempts to monetize Yahoo's mass audience, is what tipped me off to the idea of online desktop-advertising as a new and untapped space that's quite unlike online search-advertising.
Who will be the winner of the coming battle for desktop-advertising? Now one knows. What we do know is that the right enterprise marketing strategy could tip the scales. After a friendly merger Yahoo and Adobe could lead the way with free applications, fat margins and mass distribution.
Here's what Shantanu Narayen, the new CEO of Adobe, said about their decision to give away the Mother Lode in 1993:
When we first launched the Adobe Reader, we charged for it. Adoption was slow. The problem was that there wasn't enough of an incentive at the time for people to purchase it. Yet, proliferation of the Reader was critical in order for Acrobat to catch on.
We went back to the drawing board to re-think our strategy and ultimately decided to distribute the Reader for free. This was a significant policy shift and a radical approach at the time. The move was a controversial one inside Adobe ... many didn't believe in the idea of giving away such sophisticated technology. It was a strategic decision to sacrifice revenue in order to make the Reader universal and establish PDF as a standard. Now it's a major competitive advantage for the company. It drives the adoption of our [other] products ...
Adobe has since built their businesses by giving away sophisticated technologies. Here is what the company says about open standards on their web site:
Adobe's core business strategy is to drive growth through broad adoption of its technologies, and an open approach has always been an important part of that strategy. Throughout its 25-year history, Adobe has been an industry leader in open approaches with technology.
Yahoo! gave away all of its sophisticated technologies in the hope its mass audience would pay off in online advertising. And that's just what happened, until Google spoiled its party. Can Yahoo and Adobe regain the high ground?
Gross margins rule in enterprise marketing.
In addition to offering free applications like Buzzword to prime the pump in market development, the merger of YHOO and ADBE would produce a new enterprise [YADO?] with sufficiently fat gross margins to challenge Microsoft and at the same time trump Google in the coming battle for desktop-advertising.
As this table shows, YHOO is on the losing end of the gross margin stick running well below Google's 60% margins. But ADBE with its gross margins in the 90% range dominates even MSFT. More important are the 70% YADO gross margins that a merger would produce.
Now we come to the final keystone in YADO's desktop advertising strategy: free applications demand millions of eyeballs. And Yahoo! has 500 million of those. The vast majority of which are not locked-up behind corporate firewalls. Instead, these eyeballs belong to your Uncle Jim and Aunt Sue.
And guess what, Aunt Sue and Uncle Jim don't need all the mystifying functionality embedded in Microsoft's Office Suite. They can get buy just fine with only five fonts rather than the three hundred or so they are forced to buy in MS Office.
Ever wonder why these isn't a Microsoft Home edition? Actually, there is. It's called Microsoft Works. It's only $99 and it's based on Microsoft Corp.'s "Trustworthy Computing Initiative:"
Microsoft® Works Suite 2006 is an incredible value, integrating six complete Microsoft software programs - Works 8, Word 2002, Encarta® Encyclopedia Standard 2006, Digital Image Standard 2006, Money 2006 Standard, and Streets & Trips Essentials 2006 - into one comprehensive package. With the new suite on their home PC, families can get more stuff done quickly, from tracking and paying bills to managing to-do lists, so they can spend more time enjoying the things they want to do such as taking a vacation or watching their favorite sports team.
As if that's not enough the site goes on to assure us that the Works Suite 2006 includes full versions of the six popular Microsoft software titles!
But, guess what? Uncle Jim and Aunt Sue don't need an integrated suite of heavy-handed word, number, image and slide processors even for the unbelievable price of $99. Plus the cost of paying for the Computer Professor's CDs to learn how to use them.
Aunt Sue and Uncle Jim don't mind if advertising pays for their word processor any more than they mind that it pays for their email accounts and favorite TV shows. By the way the same probably can be said for a majority of their nieces and nephews who are now in high school and college. To paraphrase the opening comment by Professor Stross:
Tens of millions of online Buzzword "customers" who pay nothing for the service but whose attention would be highly valued by Yadobe are worth as much -- if not more -- than a few dozen well-paying Fortune 500 customers!
ITS A VISION THING
Those of you reading this post who have followed the 60 other articles I've written in my series on Competing for Customers and Capital may be wondering why I haven't taken this analysis the final step. If so, you may be thinking: Where's the prediction of Yadobe's closing stock price on December 31, 2017? The reason I haven't is that sometimes an enterprise marketing strategy goes beyond the reach of numbers. Then it becomes a vision thing.
Disclosure: The author is long YHOO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.