Who Does Yahoo! Want to Wrangle?

Yahoo! has been in talks with both Time Warner and News Corp. this week, according to several reports, seemingly desperate to stave off Microsoft's bid, which it rejected. The Time Warner talks involve Yahoo's potential purchase of AOL, while a deal with News Corp. would have Rupert Murdoch's conglomerate swapping MySpace for a 20 percent stake in Yahoo! (Interestingly, both options have floated around in the past, as discussed here and here.)

Both talks seem to be tactics to pressure Microsoft to raise its bid, which Jerry Yang, Yahoo's CEO, said undervalued the company. In fact, others have quickly pooh-poohed the talks as just that — all talk and no real threat of action. But if the end of the road really is Yahoo! and Microsoft joining forces, what do the talks suggest about what strategy Yahoo! will take to regain strength?

When Microsoft's bid for Yahoo! first became public, the foregone conclusion was that it was a strategy to take down Google, against which both have struggled, in search and advertising. But neither AOL nor MySpace would offer Yahoo! much leverage in that area. Reports have speculated that difficulties in attracting advertising on areas of MySpace might lead Murdoch to drop the social network in Yahoo's hands. And AOL, of course, is struggling on all fronts in the new Internet.

However, as the leading social network (still, despite Facebook's surge), MySpace has considerable value as a destination site. AOL, though continually waning, has some entertainment value as well, with properties like AIM. And Yahoo! continues to be a successful portal. All these sites have engagement assets in common, unlike Google, which dominates search and has plenty of useful tools but isn't really a destination site (unless you count iGoogle, which has plenty of competition from other startpage aggregators like NetVibes).

ZDNet, which takes the minority view that Yahoo! and News Corp. should make a deal, argues that Yahoo! should reframe itself as a media company. Some support for this may also be found in Patrick Sauer's article from our current issue on how Yahoo! Sports is thriving in its competition against ESPN.com.

This repositioning of Yahoo! may be well and good, but does it mesh with Microsoft's goals for an acquisition? Seemingly not. And considering that Microsoft and Yahoo's combined forces still wouldn't be enough to topple Google in search, figuring out the next steps after the deal, should it happen, would be quite a cumbersome process. It may very well set both companies back even further.

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2 Comments

  • Rayne Tech

    How does Yang see Yahoo!? I think that's a fundamental question here. Yahoo! started as a web portal, and for all intents and purposes, remains a portal with extra bells and whistles attached to it to encourage users to remain within the portal. This is vastly different from a company based on search technology. If Yang still sees Yahoo! as such, the equation changes completely. It also matters greatly what the directors believe Yahoo! to be; it doesn't appear that the board is in sync with Yang, and therefore have an entirely different idea what Yahoo! (and what it's worth to them).

    The AOL-TimeWarner merger failed in part because AOL remained an ISP; it struggled with morphing into a content creator/provider, while TimeWarner struggled in the same way so many traditional media outlets have struggled with moving from bricks-and-mortar print to online delivery. TimeWarner never really figured out how to take advantage of the captive audience that AOL brought to the table -- because they still don't grasp the mechanics of an attention-based economy.

    What is it that Microsoft wants to acquire in Yahoo!? A replacement for its less-than-competitive search product? That could be a problem if they bought a portal instead; MSFT would have to let Yahoo! lead in this area, but acquired brands don't survive contact with MSFT to become or remain household words, and Yahoo! is less a search provider than portal. Does MSFT want a distribution system? This might be a reasonably good fit, since Yahoo! as a portal provides this capability. But what is it that MSFT wants to distribute -- software that is already being sorely tested by web-based alternatives? It's as if another piece was missing in this equation, a better next generation of software closer to Web 3.0 (like Adobe?).

    An analyst at MarketWatch suggested over a week ago that the entire offer by MSFT was a head fake. Many observers assume that the MSFT-YHOO merger was intended to counter Google as a competitor. However there are other players that are seen by the public not as search providers or portals, that offer both search and distribution. The MarketWatch article specifically named Amazon as the real competitor.

    IMO, it would be better for MSFT and YHOO to create a collaborative partnership -- perhaps a joint venture -- that allows them to do what they each excel at, while providing each other what they don't do. It would preserve their branding, their autonomy, while avoiding costly pitfalls like corporate culture shock that a merger would entail. I'd actually buy their stock if they could pull this off.

  • Marc Hausman

    I think Yahoo! is doing right by its shareholders by exploring all possible alternatives to Microsoft. Especially since this was an unsolicited bid.

    One under-reported issue is how Jerry Yang is most likely furious about the lack of confidentiality at the Board level. Consider the recent article in the New York Post that cited unnamed sources close to the situation who detailed how a group of Yahoo! board members (including chairman Roy Bostock) are amenable to accepting Microsoft’s offer to buy the company.

    Yang should expect that board-level discussions and disagreements be kept in the utmost confidence. Failure to do so by anyone on or associated with the Board is a blatant disregard for confidentially agreements, as well as ethically questionable.

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