Microsoft's Yahoo gambit: For a fistful of dollars

09 February 2008

Microsoft's primary interest in Yahoo is not one of technology; but of eyeballs.  With Google's business growing at a phenomenal rate Microsoft needed to act fast to stay in the race, says Richard Edwards, Butler Group information management practice director.

Microsoft's unsolicited (and somewhat generous) bid of $44.6bn last week for Yahoo has stirred-up a hornet's nest of protest from Google. The company's senior lawyer and apparent spokesperson, David Drummond, is reported to have said that Microsoft's "hostile bid" is an attack on "the underlying principles of the internet", and that the company would seek to block any deal between Microsoft and Yahoo on antitrust grounds.

There are a great many angles to this story and it is nigh-on impossible for one person to consider them all. However, by way of a collective mind-meld, the Butler Group Analyst team has the following to say on the matter.

The first thing to note is that Microsoft's primary interest in Yahoo is not one of technology; it is one of eyeballs. Yes, Yahoo does have some very "cool" technology, especially for mobile devices (Yahoo! Go). But the ferocious, all-out nature of Microsoft's bid clearly indicates that there is much more at stake here than technological prowess: the advertising dollar.

However, unlike today's corporate IT world, web consumers (and that includes you and me) are able to move their "allegiance" whenever the mood takes them, unless, that is, you have them bound to a social network of friends and family - hence Microsoft's $240m-minority stake in Facebook in November 2007. If the deal goes ahead, Microsoft might just have what it needs (Instant Messaging, social networking, gaming, user-generated content, etc.) to corral a significant proportion of the web population and to then funnel this vast community past its lucrative advertising hoardings.

Whichever way one looks at it, from a commercial perspective, the web is very much a numbers game, and so with Google's business growing at a phenomenal rate Microsoft needed to act fast to stay in the race. If I were a Microsoft shareholder (which I'm not) then I would be encouraged by the deal, as growth and profit are fast becoming inextricably linked to the dynamics of the web.

Looking at Microsoft's traditional revenue streams of Windows and Office, then one can see how the acquisition might bolster Microsoft's Office Live strategy by driving traffic toward its online services. Although rankings vary from country to country, the Yahoo web site has consistently been the number-one destination on the web according to Alexa, with MSN dipping to fifth spot as Microsoft redirects traffic to live.com.