“It’s over. Isn’t it?”
— the end of Killer Klowns from Outer Space
Act 1 ended with a temporary resolution: Microsoft deciding not to “go hostile” and instead withdrawing their offer to buy Yahoo! After a brief intermission, Bill Gates’ announcement of Live Search Cashback is bang-up start to Act 2, featuring guest star Carl Icahn, with the finale already scheduled at Yahoo’s repeatedly-postponed shareholder’s meeting … grab some popcorn!
So it seems a good time to revisit what I said back in February in Yahoo!!!! (was Yahoo!?!?!): Why, after further reflection, I think Microsoft’s offer for Yahoo! is a brilliant strategic move, especially:
If Microsoft acquires Yahoo!, it’s clearly #2 in a duopoly in search and in advertising, at least for a while. On the other hand, if Yahoo! rejects the offer and melts down, then Microsoft probably picks up more of their search and advertising share than anybody but Google — and Microsoft becomes #2 in both duopolies. Either way, looking a couple of years out, this alone could bring an additional ~$5-10 billion/year in profits even if the deal doesn’t go through
Three key points to keep in mind:
- in both search and online advertising, Microsoft is likely to be very profitable if it’s in a duopoly with Google; if there are three or more big players, it’s more likely that Google wins and everybody else breaks even at best.
- the dynamics of the advertising business are based around a virtuous cycle: more inventory means more advertisers which makes the inventory more valuable which leads to more inventory …
- search market share is extremely valuable inventory for advertising, so it’s a huge advantage to have offerings in both
Yahoo! partnered with Google as part of its strategy to fend off Microsoft, and is testing Google providing the ads for Yahoo!’s search results. This gives short-term revenue to Yahoo, but dramatically weakens Yahoo!’s own advertiser platform. A couple of years ago, when the Ad Astra project was exploring game-changing strategies, we proposed a similar strategy for Microsoft*; we estimated that it could bring in $1B+ additional short-term revenue, but the consensus was that it also would have destroyed any market position in advertising. I don’t know any details of the Yahoo!/Google discussions, but I suspect the same applies.
In fact, simply by pursuing the deal with Google, Yahoo!’s sent a strong message to all of their advertising partners: “we think we can get more money for our inventory by selling ads via somebody else”. Their partners may decide “hey, if Yahoo!’s advertising isn’t good enough for Yahoo!, maybe we should look somewhere else too.”
If people do decide to move away from Yahoo! advertising en masse, well, it’s great news for Google, of course, because that’s where a lot of them will go. It’s even better news for Microsoft, though. First of all, especially in the display ad area, Microsoft (and aQuantive) can hold its own with Google (and DoubleClick), so there’ll be a chunk o’ new business. Even more importantly, if Yahoo!’s advertising business falls apart …
Guess who’s in the duopoly?
Moving on now to search … Jessica Mintz’ AP article Microsoft lures search traffic with cash rebates has a good summary:
Under the cash program revealed Wednesday, Web shoppers who sign up for an account and buy items found using Microsoft’s Live Search cashback site will receive a percentage of the purchase price deposited into their account.
When the total reaches $5, the shoppers can redeem their “cold, hard cash” via eBay Inc.’s PayPal. Microsoft said the rebates are funded with a portion of the money it collects from advertisers.
So far, more than 700 merchants, including Home Depot and Zappos.com, have listed products on the site.
Microsoft Chairman Bill Gates said in a speech that he believes the cashback program will boost the number of people using Live Search for shopping, at least. More grandly, he predicted it will change the economics of the search advertising market as advertisers shift from paying for click on links to paying for concrete actions, like completing a purchase.
Michael Arrington’s summary on TechCrunch looks at this through the lens of competing with Google; he describes it as “both desparate and brilliant,” and makes some excellent points, including
A year ago Microsoft basically did a trial run of Live Search CashBack with Live Search Club, which lured searchers to Microsoft with offers of prizes to users for using Live Search. Microsoft went from 10.3% to 13.2% market share in a month, a nearly 30% rise. Live Search CashBack, which gives a much more straightforward payout to users, should see significantly better results.
This only applies to ecommerce related searches for now. But frankly that is all that matters. Only about a third of searches are commerce related, but those searches generate 80% of search revenue. Get the commerce searches and you’ve got the revenue. And here’s another interesting statistic – 68% of online purchases begin at a search engine or shopping comparison site. Only about 30% are from direct navigation to the ecommerce site itself
Yeah, this could work.
Of course there are as always pitfalls; some early users have reported usability problems, the prices need to be cheaper at Live Search than elsewhere, and Live Search results need to be good enough to be usable. Still, even if it’s less than 100% successful it’s likely to be a huge win. Note how it stimulates the advertising virtuous cycle as well — and, as a special added bonus, gives people incentive to sign up for Windows Live IDs, one of the key metrics Microsoft is using for the success of its entire online effort. Great timing, too, with people so nervous about the economy; saving $5-$10 here and there starts to look mighty attractive. Brilliant indeed.
However, I think Michael overlooked an even more interesting aspect: the effect on Yahoo!
Assume that Microsoft once again gets a 3% market share bump from this. Where are they going to come from? For a bunch of different reasons, a majority are likely to come from Yahoo!. So Yahoo!’s search query share takes a hit.
At exactly the same time as they’re dealing with potential shareholder lawsuits — and the need to keep their stock price up.
How will they respond? The most obvious approach would be to try to match Microsoft and give cash back to consumers. But even assuming this neutralizes Microsoft’s advantage, it’s a real problem for Yahoo! Picking numbers out of a hat, suppose both companies wind up spending $1B in the first year on that.
For Microsoft, it’s no big deal; for Yahoo!, this would probably mean game over (see aforementioned Carl Icahn and lawsuits for why). Guess who’s in the duopoly?
There are other possible responses, of course. Yahoo! does have several natural partners here — eBay, Amazon, Ali Baba, Google, and of course Microsoft. One interesting outcome is a joint venture of some form in the search area. It seems to me, though, that in most of the scenarios, Microsoft’s got a very good chance at coming out way ahead in search share; and many also further weaken Yahoo! in advertising.
And all of this is in addition to the value that Michael talked about — and the increase in Windows Live IDs. Good job, Microsoft.
And great job having Bill announce it! It’s a brilliant strategic move, and when combined with everything else is yet another sign about how serious Microsoft is about its online businesses. Work on this has been going on for quite a while; we even had some small roles in it with Ad Astra, for example as part of a competitive simulation (working with McKinsey) in May 2006, proposing a business-focused search “Quey” in a ThinkWeek paper in January 2007 that got excellent reviews, and helping out with a demo for a big executive offsite in spring 2007. Bill’s been pretty deeply involved; in fact, the first time I saw such clear numbers about the importance of commercial search was in email from Bill when I was prepping for our mashup meeting with him and Ray.** If it works it’ll turn around the search business … what a great curtain call that would be!
As for Yahoo!, probably the best outcome from their perspective is to sell their search and advertising businesses — or spin them off into joint ventures, a topic explored by Elise Ackerman and Brandon Bailey in Microsoft talking with Yahoo again: possible deal related to search ad business? in the San Jose Mercury News, Then Yahoo! can focus on their core of communication, community (Mail, Messenger, Flickr, Answers, …) and content (portal and their partnerships). It’s hard to see how they’ll get there from here, though. We shall see …
Popcorn, anybody?
jon
* in a particularly tasteless example of Microsoft culture, a senior technical leader in an email discussion compared me to Neville Chamberlain for suggesting this. Because, y’know, Microsoft temporarily ceding some of the advertising business to Google is really the same level as WWII and the Holocaust.
** this was also the meeting where we pitched the idea of doing politically-oriented MsDewey clones. A nd look, a mere 17 months later, check out Digital Inspiration’s quick description of Microsoft’s LeftVsRight. Alas, I couldn’t get beyond the cringeworthy sexism in the opening clip … oh well. It remains a great idea, especially if coupled with Microsoft Research’s BLEWS. Maybe v2 will be better.
jon | 27-May-08 at 8:17 am | Permalink
“So. What’re you in for?”
Killer Klowns, by The Dickies
jon | 27-May-08 at 8:55 am | Permalink
Meanwhile, back in Vista-land, Ina Fried has an excellent interview with Steven Sinofsky in Windows chief talks ‘7’ on CNet, including
Putting aside how that does or doesn’t sit with the “Vista Capable” decisions, not wanting to talk about product or execution issues of the past (Vista) or present (SP1) doesn’t give me a lot of confidence that they’ll be addressed in Windows 7. It doesn’t help with customers and analysts either. This is a long-standing tradition in Windows (executives didn’t allow the post-mortem analysis of “the Longhorn reset” to be distributed) but as a shareholder it’s very disappointing to see Sinofsky embrace it with such a vengeance.
and Sinofksy’s closing:
Well, all right then. You won’t talk about the past or present, you won’t talk about the future because of your fear of making mistakes and an attitude that we don’t really need the information and couldn’t absorb it anyhow, everybody on your team wants to talk about it but you’re saying no, and you won’t commit to any details. But you’re working super, super hard. Good to know.
Update, May 30: I had missed Chris Flores’ Communicating Windows 7 on the Windows Vista Blog, which points off to the Sinofsky interview and uses some very similar language. “This means sharing the right level of information at the right time depending on the needs of the audience.” And since we clearly don’t need to know anything right now, it ends with the same reassurance that we don’t need to worry our pretty little heads about it:
Webhost Tips | 28-May-08 at 1:46 am | Permalink
This love-and-hate drama between Microsoft and Yahoo will only hurt their stocks in the long run.
jon | 29-May-08 at 8:06 am | Permalink
I saw the link to the Sinofsky interview in a thread on Mini, where four of the five people who voiced an opinion liked his performance. In the rest of the world, all eight of the people I’ve asked so far (half Microsoft employees) agree with Anonymous@7:42 on Mini:
Well said. The Slashdot crowd also makes some excellent points and has some good “5: Funny” comments as well. The fact that most of the people on Mini don’t seem to see it that way is another great example of the reality distortion field hovering over Redmond — and so is the cloud-bashing by the surprising number of people who don’t still seem to get this whole “web” thing.
They are however acute observers. A detailed price comparisons between Live Search cashback and Google showed much higher prices on Live. Oh dear. It’s astonishing to me that a company that prides itself on “execution” could get this wrong going out of the gate. For this strategy to work, Live needs to be known as the place to save money; at least initially, they would have been much better off with items where they had exclusive prices. Starting out with a bad reputation on this front will be a difficult handicap to overcome. Even brilliant strategies can be screwed up by execution mistakes. Sigh.
Update, June 1: another anonymous poster did some more digging and found that on three of the four items, the Live Search prices actually are lower than Google. Hmm. Giving the impression of higher prices despite having lower prices in reality is also an execution screwup; hopefully it’s easier to fix.
jon | 29-May-08 at 8:46 am | Permalink
My morning blogcheck today started with a couple of very interesting posts. First of all, MiniMSFT’s What’s up with Microsoft India? extracts a long-running thread from the comments about Microsoft India which contains allegations of corporate nepotism by ex-HP’ers, hints of some kind of financial scandal, a GM who either is or isn’t leaving, and signed appearances by senior Microsoft employees Sudeep Bharati and David D’Souza. It’s a very interesting situation, and an example of how the presence of a blog like Mini really changes the dynamic … and of the value of anonymous speech. Unfortunately, the last discussion of MS India on Mini degenerated into anti-Indian racism, and with comment #3 here saying “Let the wogs start their own blog. Do we have to do everything for them?” we seem to be in for more of the same.
And in a multi-dimensional “when worlds collide” moment, Autumn Sandeen’s Interview Of Microsoft’s Megan Wallent For The Radical Guy Show at Pam’s House Blend links to Ethan St. Pierre’s podcast as well as an earlier ABC Nightline interview. The headline for the ABC transcript, credited to Neil Karlinsky and Alyssa Litoff, summarizes: Transgender Executive: ‘Just a Different Person Now Than I Was Then’. I’ve recently been following a completely different topic at Pam’s (minority blogger representation at the DNCC), and so it was a shock to see a Microsoft-related post there. It also triggered a lot of memories for me: while it’s nothing compared to what Megan has had to deal with, especially as my job got more political I was the target of a lot of attacks and insults, including getting anonymously trashed for my attire both on the company blog InsideMS and … on MiniMSFT!
Told you it was multi-dimensional.*
Tying back to the Sinofsky interview I talked about in my previous comment: during her transition, Megan also moved from the Windows organization to Ray Ozzie’s group, which does Live Mesh and other cloud-focused work. Windows as an organization is extremely male; many guys there were visibly uncomfortable if I showed up in a meeting in pink jeans and tennis shoes. [Would Megan have been able to transition so successfully in that environment?] One way of looking at the angry and irrational reactions so many long-term Redmond-based Windows guys have to web 2.0 and cloud computing — and for that matter Sinofsky’s attitude of “we don’t have to tell you what’s going on, we know what’s best for you, we’re smarter than you” — is as typical reactions of males (and male-dominated organizations) under threat.
And similarly, one way of looking at the anti-Indian attitudes is as symptoms of “American privilege under threat”, since it relates to Microsoft’s stances both on doing more development overseas and in favor of expanding H1B visas (a topic touched on briefly in David Sirota’s recent The Uprising). Microsoft has been incredibly Redmond-centric, and hence US-centric; its relations with “the subs” have had elements of classic corporate colonialism. [The “we know better than you” attitude applies here as well; one time, after two months of planning to goals set by corporate, all the subs flew to Redmond and were told to ignore their numbers because new ones had been picked. Sigh.] Ozzie and others are pushing a much more decentralized model, and with good reason: products developed in-region (and customized in-country and in-culture) are far more likely to be good fits for what people want than products developed in Redmond. Sinofsky, by contrast, has been a proponent of moving very slowly on expanding overseas development — except of course for sustaining engineering, generally regarded as “easier” and “less creative”, which already is done in India.
The Yahoo! acquisition would have decentered power from Redmond; and it would have helped move forward the web-focused vision. I can certainly see why Redmond-based Windows developers opposed it and celebrated when it didn’t happen. However, I think the underlying dynamics are pretty clear. For those who wish it were still the 90s, it’s only a temporary respite.
jon
* And as a special added non-Microsoft-related bonus, this is the same Ethan St. Pierre who interviewed Deborah on The Radical Guy as part of the “Stop Real ID Now!” activism campaign last year. See, it really all is connected.
jon | 30-May-08 at 10:03 am | Permalink
Matt Stoller linked to the post on Mini on his OpenLeft Opening the day roundup yesterday with an interesting comment:
I see it more as a set of interacting stories, but the underlying point is spot-on: narrative as a strategic force.
Mini occasionally moves comments to the alternate “cutting room floor” blog, and there was a good example of this yesterday from an anonymous commenter describing the Redmond campus as “little India” pointing out underrepresentation of blacks and Latinos at Microsoft, and ending with “Is america really lacking talent or is something much more sinister going on?” Mini’s comment:
jon | 05-Jun-08 at 11:43 am | Permalink
The What’s up with Microsoft India? thread’s up to 120 posts; I’m not sure if there are others that have been deleted. It’s amazing reading, although not pretty. There are repeated calls to Kevin Turner, Steve Ballmer, Lisa Brummell, Jean-Philippe Courtois to pay attention and do something. Hopefully one or more of them is reading the thread and getting things in raw form, rather than filtered.
More positively, Microsoft cut a deal with HP, the US’s largest (I think) PC manufacturer, to place a Silverlight-based toolbar that defaults to IE on their machines. My first reaction is that It’s quite likely that Microsoft is taking a loss on this, at least initially; a couple of years ago, we looked hard at the Dell toolbar deal [part of the prep for that competitive simulation] and it’s hard to believe that their search and keyword advertising position has changed that much for the better since then. Aha, but it’s Silverlight, which has great graphics, and so it’s possible that this will be a new category of keyword-targeted display advertising; thanks to the purchase of aQuantive, that could work out very well for Microsoft.
And in any case, even if it’s a loss initially, it’s probably a good investment for Microsoft: it puts more pressure on Yahoo!, and even more importantly it proliferates Silverlight. Microsoft closed a great deal with Tencent in China to base their QQ instant messenger/social computing apps on Siliverlight. 300 million seats here, 5 miillion there, pretty soon you’re talking some real market share.
[For those on the Microsoft network, analyses of the Google Dell toolbar deal — and the other prep materials for the simulation — used to be on the Ad Astra sharepoint site, and might still be there.]
jon | 22-Jun-08 at 10:17 pm | Permalink
Eric J. Savitz’ Carl Blogs, Jerry Bumbles, Steve Balks, Yahoo! Bleeds on Barrons updates on the latest twists and turns, with Yahoo!’s stock at $23 after rejecting Microsoft’s offer to buy the search business. It’s a good old-fashioned proxy fight looming for the August 1 meeting:
Heidi N. Moore’s Microsoft to Internet: Drop Dead is a great companion piece, excerpting and commenting on Steve Ballmer’s interview with the Financial Times
Indeed. Still, right about now, I’d much rather be Microsoft than Yahoo!