Counter-Point to Calacanis on Yahoo-Microsoft Deal

Posted on July 29, 2009. Filed under: Uncategorized |

69calcanis2Jason Calacanis penned an elegant and well reasoned blog post today implying that Yahoo has committed suicide by entering into a 10-year search deal with Microsoft.  I would like to make a few points explaining why I respectfully disagree with Jason.  

I believe that board rooms all over America were heavily distracted by Google’s rise. Envious of Google’s success, many companies wanted to remodel themselves as a Google look-alike. This affliction was most prominent with the Internet’s four leading non-Google players: Ebay, Yahoo, Amazon, and Microsoft. For the past 5-10 years, these companies have been distracted from their core mission and focus in life, and more importantly from areas and markets where they actually had a competitive advantage, to try and follow Google (using Google’s playbook).  

aj-19Laying chase to a company in an increasing returns market (the ad network creates this), is a tough and difficult game.  Moreover, you are adopting an offensive game plan that is basically a carbon copy of Google’s, yet you are starting from way behind. How could that possibly work?  Lastly, it is not at all clear that “if” the market fragments, that the equity value of the pieces, equals the current equity value of Google. In other words, bringing competition to the market may actually whittle down the size of the aggregate prize.  

Of these four companies, I believe it was Amazon who first realized that playing Google’s game to beat Google was clearly a distraction (remember A9?). Amazon went back to focusing on their core business and even launched a new business (AWS) where they were in the driver’s seat in terms of controlling the offensive game plan. Both of these actions resulted in huge equity value creation.

For all their efforts, its unclear to me that Yahoo or Microsoft have created any positive equity value whatsoever based on their obsession with Google. I do not have access to the specific numbers, but from a cash flow perspective it would be easy to imagine that its a net negative for both of them.  

Now one could ask the question, “does Yahoo have a competitive advantage in a market outside of search from which they can build billions and billions of market capitalization?”  You have to look at this question on a relative scale. I certainly believe that they have a better chance building around their core strengths (Finance, News, Sports, etc) than they do trying to mimic Google.

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25 Responses to “Counter-Point to Calacanis on Yahoo-Microsoft Deal”

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[…] Jason and I believe that it is worth reading his post and the counter-points by Fred Wilson and Bill Gurley. CrunchBase Information Yahoo! Bing Information provided by CrunchBase Leave a […]

[…] Jason and I believe that it is worth reading his post and the counter-points by Fred Wilson and Bill Gurley. CrunchBase Information Yahoo! Bing Jason Calacanis Information provided by CrunchBase […]

Yahoo indeed has a tremendous core strength which they can uild upon — it’s their community(s). Trying to build an adserver (the primary focus of the prior leadership team) was most likely suicidal. It will be interesting to see if the new leadership recognizes Yahoo’s real assets and builds upon them.
I think MSFT is in a markedly different position. There Google is using its vantage point to attack core MSFT revenue streams essentially by offering much of the MSFT value for free (apps, mail, etc.). One could make an argument that they have to find a way to undermine Google’s core revenue stream or face the consequences of having much of that revenue turned into R&D which builds capablity targeting them.

I completely agree with this, especially with why Microsoft must play. If Microsoft deteriorates the value of search, no problem.

Bill,

I agree and also disagree in degrees.

I think Amazon should have never been in the search space. It is good that they left.

I think Yahoo should categorically decide to either do it, or not. Both options make sense. However, what they have done was neither. That obviously doesn’t make any sense whatsoever. You are either in or you are out. But you cannot be both.

Microsoft has to be in search. They cannot afford not to be. You are obviously right: if there are many competitive players in this market, then the market will shrink. This is ideal for Microsoft. Microsoft is being attacked by Google both at the OS and application level. The best way for Microsoft to defend themselves is to attack Google in the only revenue generating business that they have: search. Leaving Google to its own devices in this space, basically allowing them a free lunch and dinner without any pressure would be a huge strategic mistake.

[…] argues that Yahoo just committed suicide, while Bill Gurley thinks the opposite, that Yahoo had to get out of Google’s way to […]

I agree folks have become obsessed with being Google, and with good reason: their killing it.

Yahoo’s search product, and now Bing’s, are actually as good (or close to as good, or slightly better) as Google’s in side by side blind tests. With some additional focus and innovation I believe that Yahoo could have started to chip away at Google’s marketshare… if they could get another 5-10% of search back they would be worth another 5-10b in terms of their market cap. That’s a better deal than $200-400m a year (or whatever they will get/save).

Now, if you believe that Yahoo is:

a) is not technically competent
b) spread to thin (like peanut butter!)

Than one can easily come to the conclusion that they should sell.

Keep in mind that Amazon and EBAY were starting from zero when it came to their Google-envy. Search was in Yahoo’s DNA and they are not starting from scratch.

I appreciate the feedback Bill and agree with 61% of it (especially the part when you call my blog post elegant!).

See you at the poker table/TechCrunch50!

Nice thoughts, Bill. It’s fun to apply Jason’s analysis to his own decision to sell his past company, n’est-ce pas?…

and his current position with Mahalo “might” affect his position on this topic.

[…] Counter point to calacanis on Yahoo Microsoft deal by Bill Gurley « Planes coherentes para tener un iPhone en México […]

this sounds like the argument many used against apple for several years when trying to compete in the O/S space against microsoft. get out of software, focus on hardware. their success proves the unique combination can become interesting, you just have to innovate. so it should have been with yahoo and search/media. regarding search as a distraction for them is mind-blowing. there is pretty much no scenario under which finance, news, sports growth could provide the same returns as an innovative combination of search and media. they have capped their upside.

the biggest mistake yahoo made was letting themselves be convinced that #2 is a bad place to be for any of its businesses, let alone the best of its businesses. history will not be kind to yahoo.

i disagree with this point. Apple was in the computer business before Microsoft & building great computers was ALWAYS their competitive advantage. Moreover, history will primarily be unkind for turning down $34. Were working from there.

[…] (then Ann Taylor CEO) Written by Chris F. Masse on July 30, 2009 — Leave a Comment That’s my thought about the Yahoo!– MicroSoft search […]

Well said. This is a positive move by Yahoo.

With this money they should be looking at interesting acquisition opportunities. These names come to mind – Automattic, Six Apart, Glam Media, Slide or maybe the likes of Foursquare.

Calacanis is wrong.

In all of his examples (Nintendo, Apple, etc) – the companies occupying the space being invaded by Microsoft had no other option but to stand and fight. They had a single core business, and no true option to flee to another market space.

Yahoo is different: it has two businesses – search and display.

Rather than waste limited resources on a losing battle, it is doubling down in the space where it still leads – display.

I agree with Calacanis’s philosophy: Innovation is the answer. I disagree with his conclusion: that yahoo made a mistake. Yahoo is letting two companies with virtually unlimited capital slug it out in the Search space, and will innovate somewhere else, where management obviously believes there’s a greater chance of success.

Very well said.

Bill – by the same rationale, does it make sense for Microsoft to lay “chase”? I don’t necessarily disagree with your view, but I think it is important to consider that a) Yahoo did have an asset that was driving superior search monetization but did not iterate / evolve and effectively allowed Google to become the clear #1 in monetization and perhaps even behind Ad Center; and b) didn’t brand Algo search in an effective way (unlike Microsoft seems to be doing). Y! Search could have been a strong #2, and a strong #2 in the largest ad market around would have been pretty special.

i think that ship has sailed. if you could go back , you take $34/share….right?

Most definitely, instead of trying to chase Google in search, by outsourcing this to Microsoft, Yahoo can focus on areas where it can uniquely add value. This is where their new CEO has her work cut out for her. She can definitely play it safe and increase shareholder value by focusing on execution, but boy would shareholders be appreciative if she “pulls an Apple.” Totally possible, but a long shot IMHO.

Except that no one ever got big outsourcing search. Both Yahoo and Microsoft had enough scale to be competitive. Once you reach a certain scale in search, more scale doesn’t help all that much and could hurt. It’s fine to copy the AdWords model because it’s easy enough to spread around buying to 2 or 3 networks looking for the best value. I don’t get this deal at all unless it’s a pre-cursor to an acquisition.

“It’s fine to copy the AdWords model because it’s easy enough to spread around buying to 2 or 3 networks looking for the best value.”

Good theory but the market has proven otherwise. There are 700k+ advertisers that advertise on Google but not on Yahoo or Microsoft. Scale has proven to be absolutely critical on the advertiser side of the equation.

What about Mozilla/Firefox?

I think Jason Calacanis’s post makes sense but it doesn’t point out that Yahoo! Search has already tried for a long time to become the Nintendo Wii of the Search market. At some point it had to cut its losses (ala A9), focus on its core strengths and double-down on those instead.

Interesting post. I agree about Yahoo focusing on strategic advantage.

The big problem is they *should* have been able to be strong in search. That yahoo wasn’t able to get there truly seems insane and there’s just no excuse for it.

To be dropping search in favor of yahoo finance, etc is shocking.

Maybe it just speaks to Yahoo not having anyplace to go from here. Which would be a shame.

I agree with you and think Jason is all wet on his analysis. Yahoo had a short stack in old search and is going all in on future of search. I think Yahoo played it nicely and the effect to normalizing the “mature segment” of old search is a good thing.


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    …focusing on the evolution and economics of high technology business and strategy. By day, I am a venture capitalist at Benchmark Capital.

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