Saturday, February 2, 2008

Microsoft and Yahoo: A perspective

Probably the biggest news this week wasn't gaming related at all, rather it was the enormous $44.6 billion offer by Microsoft to take over the ailing Yahoo. Offering a 62% price premium, the deal has been structured by the software giant to make it almost impossible to refuse by Yahoo shareholders. Make no mistake, this is a hostile takeover attempt, and burnt by the dotcom bust, it seems likely that Yahoo will have little choice but to accept.

So why would Microsoft be interested in Yahoo? On the surface it might not be clear. Both offer similar online products and services (Yahoo mail, messenger, search etc), with little of Yahoo's products standing out against Microsoft's Live suite. The answer almost certainly lies in market share, advertising revenue, and the ability for Microsoft to sustain competition with Google. Most online analysts would say that Microsoft has been falling well behind in the online race for supremacy, with Google appearing younger and more agile with its range of online products and services, and being able to generate massive advertising income as a result.

Google's flagship search and Adsense technologies have resulted in a self-regulating profit generator, with the huge traffic volumes being attractive to advertisers, which in turn generates more relevant advertisements and hence income. If Microsoft hopes to compete effectively with Google in the online space, they need to grow, pure and simple. Acquiring Yahoo, and amalgamating Yahoo's online services with Microsoft's offerings will allow them to do just that.

Only time will tell how this will all pan out. Even if Yahoo accepts the deal, antitrust issues as have plagued Microsoft in the past, particularly in Europe, may rear their ugly head and prevent the deal from going forward. Assuming it all goes ahead, Microsoft will need to approach Yahoo customers carefully to avoid losing too many to its competitors, particularly Google, as well as deciding how, and if the Yahoo brand should live on. Either way, this is clearly a more aggressive Microsoft, and perhaps a window in the future of the company in the absense of Bill Gates. Is this the last takeover of this type we'll see from Microsoft going forwards? Magic Eight-ball says no.