The Seattle-Search.com Blog

Microsoft decided to muck its high stakes poker hand and the wager that it could induce Yahoo’s board to accept a $33 a share takeover offer and abruptly “left the table” last Saturday.

Apparently spooked by the prospect of a widening ad share arrangement between Yahoo and Google, and the unfavorable possibility of other defensive maneuvers that would further diminish Yahoo’s  value, Microsoft CEO Steve Ballmer turned on his heels.  Only afterwords, did Yahoo CEO Jerry Yang, tail between his legs, try to explain he was open to the deal all along. Yeah, Right!

Defending his company against allegations that they didn’t try hard enough to deal with Yahoo, Bill Gates spoke out in Tokyo yesterday, “A lot of effort” was put into trying to work out a deal and that the pair should pursue “independent paths”.  Gates continued, “Now at this point Microsoft is focused on its independent strategy.”

To this observer, Microsoft made the right move. Not to devalue what Yahoo could have meant to a Microhoo alliance, but the prospect that 1+1 would equal something other than 1 in this equation was speculative at best.

Ironically, many in the Search advertising world credit Microsoft with the more sophisticated technology when comparing the sharply innovative adCenter system with the often klugey Yahoo upgrade of a year ago, code named Panama. Microsoft’s keyword research tools, demographic targeting options, and the potential of visual search with Photosynth are, for starters, all more impressive than Yahoo’s technology. What Microsoft was seeking with Yahoo was simply popularity: the brand recognition (something it would ironically replace), and Web traffic,which can be fleeting. The joke on the street was that, for the asking price, Microsoft could buy the allegiance of Yahoo’s installed base by paying each user a handsome bounty.

What would a combined Microsoft-Yahoo alliance do for Microsoft that Microsoft could not do for itself? That question was far from easy to answer. Only now it will be up to Microsoft to find the path on its own. The results could come as quite a surprise for the stakeholders. Stay tuned!

Microsoft has made it clear that it  would borrow at least part of the funds to make the gargantuan shareholder payoff to acquire Yahoo Search in what has been presented as a “half-stock, half-cash” deal. Analysts are already sharpening their pencils to calculate the kind of ROI that Google Analytics might report for the CPA (cost-per-acquisition) of the transaction.

In December of 2007, Google owned a 68.1% market share on daily search activity. Microsoft’s MSN and Live search owned 9.1% market share and Yahoo! 17% in the final month of the year. Ask market share and search volume has continued on a gradual decline.

During the last four quarters, Microsoft’s revenues for its online services (MSN, Windows Live, aQuantive, etc.) were $2.8 billion and it lost $949 million.  Combining Yahoo’s revenues with that business, you get a combined sum of $9.8 billion, but Microsoft would still show a net loss for that business of $289 million.

Ventures like Yahoo! Mail and Yahoo! Finance, are extremely successful and boast loyal followings. But Yahoo! Mail faces stiff competition from Gmail and Microsoft’s Hotmail, one of which will be compromised by a consolidation. Yahoo’s  financial site also faces challenges from News Corp.’s recent decision to free WSJ.com. Yahoo! Personals is one of the largest online dating sites, but user-driven platforms on Facebook, MySpace, and even Craigslist will gain market share in the matchmaking world over the next few years.

According to comScore, traffic spent surfing through Yahoo!’s site dropped 13% this past November, year over year. Microsoft’s MSN properties also saw a dip of 5%, but Google proved resilient, increasing 116%.

Microsoft fired the shot heard round the Search world last Friday when it bid $44.6 billion for the search assets, index and eyeballs of Yahoo, Inc.

The outrageous price tag to acquire the search industry’s beleaguered #2 search engine has been both lambasted and lauded while inviting potential White Knight potentates into the search engine arena such as Apple and NewsCorp.

Given Yahoo’s stagnant PPC system (formerly known as Panama) and Microsoft’s sophisticated challenger (formidably known as adCenter), the purchase comes down to brand, traffic and audience CPM. Yet Microsoft’s history as a brand-builder beyond Windows (an Apple/Xerox clone) has been dubious (most recently the name recognition of MSN Search was shelved for Live Search! (and we won’t go into Sidewalk, Bob, or Zune!)).

Google’s Chief Legal Officer David Drummond weighed in promptly on the marriage proposal: “Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies - and then leverage its dominance into new, adjacent markets,” he wrote.

“This is a lot like the replay of the marriage of Compaq and Hewlett-Packard, where the idea seemed good but took years to play out,”  wrote DeanTakahashi in the SJ Mercury News.

And yet, who among us would deny that Google’s dominance in online Search has reached hegemonic proportions or that only the magnitude of a Yahoo-Microsoft alliance provides the necessary counter-balance to Google’s runaway expansion?

One thing is for sure. This deal is going to take a lot of time to come together, Merging the various teams, each fiercely protective of their patches,  will be a long, traumatic affair.

Yahoo is staking its claim to an expanded role in the Puget Sound thanks to former Microsoft Windows GM David Sobeski, a Yahoo senior VP, who is playing a formative role in formation of the new Yahoo office.

Sobeski disclosed to the Seattle P-I’s Todd Bishop the basics of the new office — 115,000 square feet at Bellevue’s One Twelfth @ Twelfth, enough space for 500 to 600 people — but declined to talk in detail about hiring plans or the work that will take place there.

Sobeski’s remarks on the region were particularly trenchant: “”You’ve got Microsoft, you’ve got Amazon, you’ve got Google, you’ve got Adobe. You’ve got all these guys up here. Now you have us, and you have a pretty good talent pool. You’ve got the University of Washington. … The Pacific Northwest actually has a huge concentration of engineers, of technical people. And it’s not the old COBOL kind of guys. It’s the guys who can go figure out these hard algorithms, be it search, be it contextual advertising, be it data mining, be it any of these things. Because what you really want are just smart algorithmic people. That’s what you’re going for. Is there any difference between writing Windows kernel and writing a great data algorithm? Well, yeah, I get that there’s a difference, but you know what? It’s those smart guys who can build those algorithms, who can do it efficiently, that you want.”