Microsoft and Yahoo Chapter III

Today I’d like to spend some time discussing last week’s talks between Microsoft and Yahoo about a possible merger. Even tough it appears that merger discussions are no longer taking place; it doesn’t mean the two companies couldn’t cooperate in other ways. In fact, this is the third time both companies discussed a potential mega merger. So let’s analyze benefits and consequences from both sides.

For starters, it’s becoming pretty obvious that Microsoft’s online division has not lived up with Steve Ballmer’s expectations. There has been no progress against Google in Internet search. Further, Microsoft lost a deal to Google last month to buy online-advertising specialist DoubleClick. So it is time to consider other alternatives. One option would be to install new management to the online group, a fix that Microsoft has often used in the past. Also, Microsoft could unify the online group's services and the technology that underlies them, which are currently managed by different vice presidents. By having two groups working closer, they could compete against Google more effectively. Another option for Microsoft is to form a partnership with Yahoo as they have done in the past with questionable success. Yahoo previously provided Microsoft with search technology and advertising. However, Microsoft broke that relationship last year, as it phased in its own online-ad system, which has yet to attract a critical mass of advertisers. Bottom line, nothing really interesting from this side.

Yahoo doesn't appear interested in a major deal with Microsoft, specially these days that they have been working and depending largely on a new advertising-system upgrade, called "Project Panama”. Panama is now running and it seems that the system will contribute to company revenue, starting this quarter. Besides, Yahoo’s executives believe they have found the right strategy and are wary of any combination with Microsoft, for whom Internet activities remain only a small part of its business. On the other hand, Yahoo could benefit from some technical expertise coming from Microsoft as they could manage the technical platform and infrastructure of the companies' combined Internet activities. In addition, Yahoo's current staff could be in charge of the consumer parts of the businesses, such as Yahoo News, Finance and email. So, there might be some benefits for Yahoo.

At this point, any integration of the two companies' operations would also be a daunting prospect and it doesn’t seem doable in the short term. However, it’s clear that Google’s dominance in Internet search really worries both Microsoft and Yahoo and certainly the former has lots of power to try to turn things around. Only time will tell how this story unfolds, but definitely let’s wait for the next chapter.