As I write this, Yahoo has thwarted Microsoft's attempts at a friendly takeover, and Microsoft now appears to be gunning for a hostile takeover instead. Yahoo is talking to AOL, News Corp, and maybe even Google about possible partnerships, probably as a ploy to force Microsoft into paying more money for a Yahoo buy. All in all, it's been a fun week for watching Kabuki theater.
It's easy to see why Yahoo would spurn Microsoft's advances, not the least of which is Jerry Yang's own nostalgia over Yahoo, his online baby. But emotions aside, Yahoo should realize that a Microsoft buyout may be the best thing ever to happen to the folks from Sunnyvale.
Let's start by clarifying what Yahoo really is -- an issue that Wall Street, the press, and even Yahoo itself seems to have trouble teasing out. Yahoo is a media company. The technology side of the business is secondary.
I could give lots of supporting examples to that assertion, but I'll settle for three.
1. Search vs. Content. Yahoo is No. 2 in search (a technology), but is an unrivaled leader as a portal/content publisher. Even Yahoo's search success owes much to its portal popularity: many of its searchers originate as visitors to the content pages, and proceed to the Yahoo search bar from there. That's a world of difference from Google, the bulk of whose search traffic arrives directly to the Google brand with a search intent.
2. Leadership. Jerry Yang certainly has his tech credentials, but the company really came of age under the leadership of Terry Semel, a Hollywood veteran. Again, compare that leadership with Google's Eric Schmidt, whose pre-Google career has spanned Novell, Sun, Xerox, and Bell Labs.
3.Technology. Even where Yahoo does show real technology leadership, that tech leadership is focused largely on monetizing its content/publisher pages --with systems like its Smart Ads behavioral targeting (which looks at data from both portal visits and search), and acquisitions like Right Media and Blue Lithium. When it comes to technologies that aren't part of the content network, Yahoo often falls behind the game -- as it did with Panama.
Of course, Yahoo isn't just a media company. It's a media company with technology at its heart; as such, any technology deficiencies that Yahoo may have are real causes for concern. Which is why, to be blunt, Yahoo needs tech help.
Enter Microsoft. Microsoft is one of the most innovative technology organizations in the world; it's also a lousy communicator. Compare, for instance, the brilliant power of the Microsoft Office software with the undecipherable mess that is Microsoft Office Help. Or better still, simply recall Clippy.
Microsoft has carried that tech/communications disparity over to online media. Hence, while AdCenter has proven itself to be a truly revolutionary platform for targeted online advertising, Live.com has had such trouble attracting searchers that it's resorted to ridiculous bribery. And while poor communications may be tolerable in software, it's a deathblow in media.
That's why Yahoo and Microsoft need each other. Microsoft can provide Yahoo with the tech backup it needs, and Yahoo can teach Microsoft how to improve its interactions with online users . It's a match made in heaven.
None of the other Yahoo partnership options offer this kind of symbiosis. AOL and News Corp would both supply Yahoo with more market share as a portal, and News Corp's MySpace would obviously catapult Yahoo deep into the social sphere. But Yahoo doesn't need to become a larger portal; it needs better technology. Nor am I convinced that MySpace is Yahoo's ticket to a turnaround, as MySpace has problems of its own from rival Facebook. Google could give Yahoo the needed tech push, but it seems to have backed away from the Yahoo bargaining table. (At least part of the reason Google's backed away from Yahoo is that Google isn't interested in Round 2 of government scrutiny. Round 1 was GoogleClick.)
Of course, Yahoo would only benefit from Microhoo if Microsoft understands Yahoo's full value. The second Microsoft decides to ignore Yahoo's true core as a media company -- and instead tries to devour Yahoo for spare technology parts -- then Yahoo is entirely ruined. There's a real possibility that this will happen, and I'm sure it's a threat that keeps Jerry Yang up at night. But then again, if Microsoft leads a successful Yahoo shareholder rebellion, Jerry Yang's fears would be moot, anyway.
That's why Yang and Co.'s best opportunity is to embrace Microhoo head-on. Yahoo should certainly shop itself around in the hopes of raising its asking price, but should also realize that Microhoo may well be the best thing that's happened to Yahoo so far.
In the end, Yahoo may well transform into a beautiful MSN butterfly