Devil’s Advocate

Thursday, 7 February 2008

So, all joking aside, there seems to be a clear consensus regarding Microsoft’s offer to buy Yahoo:

  • If Microsoft succeeds in acquiring Yahoo, they’re going to make Yahoo worse.
  • Neither Yahoo’s executives nor rank-and-file employees want this to happen, but there’s nothing they can do to stop it.

I’m more certain about the second point, though, than the first. Yahoo’s executives are caught between a rock and hard place. The rock: prior to Microsoft’s offer, the company’s share price had dipped so low that Microsoft could offer shareholders a significant premium and still consider the acquisition a bargain. The hard place: even at this price, Yahoo is so valuable that there doesn’t appear to be any other potential suitor that can afford to buy it.

$40 billion is, quite simply, an enormous amount of money. To put that in perspective, one company that’s been suggested as a rival suitor is Rupert Murdoch’s News Corp. But News Corp. itself has a market cap of just $62 billion. News Corp.’s acquisition of Dow Jones & Co. (parent company of The Wall Street Journal) last year drew significant attention, but that deal was nearly an order of magnitude smaller at just $5 billion.

With no other apparent suitors, and no other way to boost the company’s share price to this range, I see little chance of Yahoo wiggling out of this.

But so what about the other point of conventional wisdom — that, if completed, the acquisition would be bad for Yahoo, and, perhaps, bad for Microsoft? That was my initial conclusion, and still my gut feeling. But it’s certainly possible that Microsoft could make Yahoo better, not worse. The reason I consider it unlikely is that it would require Microsoft to be un-Microsoftian. Here’s Dan “Fake Steve” Lyons’s analogy:

It’s like taking the two guys who finished second and third in a 100-yard dash and tying their legs together and asking for a rematch, believing that now they’ll run faster.

That pretty much summarizes the Microsoft-being-Microsoft route — in a word: assimilation. If they try this with Yahoo, they’ll choke. Yahoo is too big, and too different, to be absorbed into Microsoft.

But what if Microsoft does the unexpected and keeps Yahoo separate and distinct? On a vastly smaller scale, that’s what Microsoft has done with its Mac Business Unit. Microsoft created the Mac BU in the wake of Word 6 for Mac, which was, more or less, a direct port to the Mac of the Windows version of Word — and almost universally abhorred by Mac users. To succeed on the Mac, Microsoft needed a (relatively) independent Mac division, and so that’s what they created.

Yahoo could be Microsoft’s independent web division. Here’s how they could make it work.

Clean house at Yahoo’s executive and upper management levels and install an executive to lead all of Yahoo with complete authority and a clear vision — someone who answers only and directly to Steve Ballmer.

Keep the Yahoo brand along with all of Yahoo’s successful products — and product teams — intact. Commission one or two high-profile new Yahoo endeavors. The first should be to have the Flickr team do for video what they’ve done for still photography. (Why Yahoo didn’t do this immediately after acquiring Flickr, instead choosing to stand on the sidelines playing pocket pool while YouTube swelled into a multi-billion-dollar product, is a mystery for the ages.)

Let Yahoo continue to choose and create their own server and software development tools. Yahoo knows as much about high-capacity web scaling as any company in the world. That they’ve built their architecture around Linux, BSD, Apache, MySQL, and PHP — not a whiff of Microsoft technology — is a strength, not a weakness. Allowing Yahoo to keep this architecture isn’t just essential in terms of keeping existing Yahoo engineers happy, it would also greatly expand Microsoft’s overall corporate expertise.

Where popular Yahoo products and services compete against Microsoft’s existing products, let them co-exist in competition. Think of Microsoft’s parent role as that of a media conglomerate, like, say, Viacom or Time Warner. In the same way that Viacom owns multiple cable channels that compete for viewers and Time-Warner owns multiple magazines that compete for readers, let rival Yahoo-vs.-MSN web sites continue to compete.

In a broad sense, Yahoo reminds me a lot of Apple a decade ago. Good products, a large base of dedicated but restless users (many of them outright “fans”), and a staff full of talented engineers and product designers — but lousy, visionless, ineffective management. What Yahoo needs is a Steve Jobs — someone who will ruthlessly focus the company on products that are better, more popular, and more profitable.

Is that possible within the confines of Microsoft? I doubt it, but I hope so.