by Charlene Li

The New York Post and WSJ.com just came
out with stories
of a rumored merger between Yahoo! and Microsoft. On paper, the deal makes sense for the following
reasons, but in the end it’s going to be so hard that I don’t think it will happen.

First, let’s take a look at why it makes sense:

– Audience
combination. Yahoo! and Microsoft have two of the largest online audiences –
according to Nielsen//NetRatings, 108 million and 95 million respectively in the
US in March 2007. Google had slightly more uniques (108 million), but the
combined unduplicated audience for Yahoo! + Microsoft is 129 million.

– Advertising
powerhouse. While Google leads in search marketing, Yahoo! and Microsoft
dominate display advertising. Google’s recent acquisition of Doubleclick (which
Microsoft was bidding for as well) puts extra emphasis on the need to shore up
their dominance in this space. Microsoft’s upcoming Strategic Account Summit
next week should be particularly noteworthy given the rumors.

– Technology
strengths. Microsoft is a powerhouse when it comes to engineering talent,
between Microsoft Labs, worldwide investment in technology research centers,
and fingers in all aspects of information technology ranging from enterprise search
to mobile. Yahoo! is no slouch either, with particular strengths in display
advertising management (specifically behavioral targeting) and search, but in
this area, Microsoft is providing the bulk of the value.

– Media and
Web 2.0 smarts. This is where Yahoo! really shines – its acquisitions of
Flickr and del.icio.us and emphasis on social search and media position it well
for new challenges. Yahoo!’s executives – with their strong media roots – truly
understand what it means to build and maintain and audience.

So on the surface, it
looks like it would be a good idea. Fueling the merger fire is the strategic need
that the companies have for a combined company. After all, why would Microsoft
want to ante up $38 billion for Yahoo!? For one reason (and it isn’t simply
Google). It’s Windows, or rather, the declining importance of the operating
system as it gets relegated to the background. I personally (almost) seamlessly
switch between a Windows machine at work and an Apple at home, using a Firefox
browser and online email. Microsoft has the technology to do parts of this, but
not all of it. To survive going forward, Microsoft needs to have a robust
online strategy and Live.com/MSN just doesn’t cut it.

Yahoo! comes to the
table needing something too, but with less urgency. While it’s struggled with
the launch of its new Panama search engine, it’s in a much better position to
compete in this new world because of its focus on media and content. Its
biggest weakness is that the fight is also on the Web services/API front, where
the technology smarts that Microsoft bring would be a benefit.

But instead of debating
the merits of whether this makes sense or doesn’t, I’d like to paint a picture
of what the future would have to look for a merger to make sense – and why I
don’t think this future will come to pass.

– Separate Yahoo/Live.com/MSN
brands get merged into one brand. To fully realize the value of the merger,
I believe there needs to be true audience consolidation under one brand. This
will be tough to do as there are huge overlaps in the audience, and it would be
tough to give up on all of that extra traffic and page views. In some markets
– in Europe in particular – the MSN brand trumps Yahoo!, and in others, Yahoo!
is much stronger while in the US, the brands are equally strong. So why
consolidate at all? Because maintaining separate destinations for essentially the
same audience and purpose diverts valuable resources that could be used to
create a unique, powerful experience that can compete and win.

But
there is one major reason why I don’t think Microsoft executives have the
stomach for any sort of brand rationalization — the continued dual branding of
Windows Live and MSN. Each time I have a conversation with Microsoft about
Windows Live, I get a different explanation of what it is and how it fits with
MSN. If the company can’t event figure out its branding strategy with existing
properties, I don’t hold out much faith that they could do so with a premium
brand like Yahoo!

– A new
company emerges with new leadership. Note that this would be a merger, not
an acquisition. This means that Microsoft and Yahoo! will each have to come to
the table ready to forge a new company from the assets of the individual ones.
Egos and innate disdain from being competitors over the past decade would have
to be set aside. Geographic distances (Seattle to Sunnyvale) would have to be
bridged. And most importantly, a new company ethos, leadership, and culture,
would have to be created. Neither company has ever been through a merger, or
even an acquisition of this size and scope. And all of this done in the context
of one of the most dynamic, innovative areas of business and in the shadow of a
fierce competitor, Google. Even in the best of times, successful mergers are
hard to pull off and I’m not hopeful that executive time spent on company
politics will be minimal.

– The new
company dominates over Google. Given the problems of a merger, the key
measure of success in three years time is whether they will have made any
progress in fending off – and catching up to – Google. After all, that’s the
main impetus behind the merger, that together they would be better able to
compete against Google. But given the distraction of the merger, and also,
given that Google won’t be so encumbered, I think it would be unlikely that a
combined Microsoft/Yahoo! entity would be able to do anything against the
powerhouse. In the very long term (3 years+), there’s a chance that a
revitalized company would be in a better position to compete, but this assumes
that Google stands still for them to catch up.

Given the messiness of
a full out merger – and also the limited benefit it would bring to Yahoo! – I believe
that a merger won’t be in the works anytime soon. More logical would be
partnership agreements where the strengths of each company are shared. These
tentative first steps to a merger would make a lot more sense, giving both
companies the ability to “test the waters” before jumping into the deep end.

But if I’m wrong and a
merger does get announced, I wish the two companies good luck – they are going
to need a lot of it to pull it off.

So what do you think –
is a merger a good idea or a disaster in the making?

Tags: Microsoft, Yahoo, merger, charleneli,

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