Monday, February 04, 2008

Google weighs in on Microsoft-Yahoo bid

Google announced yesterday it finds Microsoft’s $45 billion bid for Yahoo “troubling” and also stated the move threatens the “openness and innovation” of the Internet. Senior Vice President David Drummond said the acquisition could allow Microsoft to extend unfair practices from browsers and operating systems into the Internet. He also question whether a Microsoft-Yahoo combination would take advantage of a software monopoly to unfairly limit free access to competitors' email, IM, and web-based services. “Policymakers around the world need to ask these questions,” he said. “And consumers deserve satisfying answers.”

CEO Steve Ballmer said that Microsoft had been talking with Yahoo for 18 months and called Yahoo co-founder and CEO Jerry Yang last week to make the proposal. In their statement to the market, Microsoft admitted Google was a major factor in the bid. Ballmer openly admitted that the market “is increasingly dominated by one player.” He believes that the merged entity could “offer a competitive choice while better fulfilling the needs of customers and partners”.

Nevertheless, Google has 65 per cent of the US search market and would still dwarf the combined entity which would account for between 25 and 35 per cent of the market. The $44.6 billion bid is a mixture of cash and stock, based on a total of $31 per share. The price is 62 percent greater than Yahoo's Thursday closing price of $19.18. Yahoo recently announced plans to lay off 1,000 workers and their 2008 earnings forecast has not caused great joy in Wall St. Nor is the market happy about Microsoft whose shares had their worst fall in 21 months falling over six per cent to $30.45 on Friday night. The merger is a risky move, as combining two companies that are losing market share offers no guarantees that the trend will be reversed.

In any case, the deal is a long way from consummation. Not only must Yahoo’s shareholders approve, US and European anti-trust regulators must also signoff. Getting Europe onside may prove difficult given the bad blood that exists between the European Commission and Microsoft following last year’s court battle that forced the software giant to comply with a landmark 2004 EU antitrust decision. The EU will need to weigh up issues relating to competition and privacy when making their decision. Following on from the anti-trust suit, the EU is likely to insist Yahoo's portal services should not be bundled up with Microsoft's Windows operating system on personal computers.

Despite its dominance in the PC domain, Microsoft’s move is based on their continuing failure to make a significant impression in the Internet. Blue chip Microsoft will be looking to tap in to Yahoo’s Silicon Valley undergraduate culture. Some analysts say the culture clash between Microsoft and Yahoo is not as big as it might seem. According to Charlene Li, an analyst at Forrester Research, the companies are surprisingly similar in outlook. ”Yahoo is not the sort of strapping startup it was 10 years ago,” she said. “It's a corporate organisation with its own bureaucracies.”

Writing in ReadWriteWeb, Marshall Kirkpatrick believes the acquisition will be positive from a cultural perspective. He focuses on the synergies that Yahoo will bring such as content and online innovation. He says the major threat Google poses to Microsoft is that they are shifting the software world online. To combat this, the merged entity would have to put more muscle into services such as Flickr and and innovative content sites like Yahoo Sports and Finance. “All of that will be good for Microsoft,” he said. “And it will be good for those of us who find those sites and services inspiring.”

The size of the bid shows how many Internet companies have grown to be even larger than the traditional media players. Yahoo’s market capitalisation is larger than CBS’s. The dynamism of the newer media also leaves the older players for dead. The trend for acquisition has accelerated in the last five years. Since 2002 Google have bought 27 web services, Yahoo have bought 25 and Microsoft have bought 24. In 2006 alone Yahoo acquired Bix, an advertising/contest service, MyBlogLog, a blogging aggregation tool and Kenetworks, a cellphone service. A merged entity is not just a threat to Google; it will pose a serious threat to News Corporation, Disney, Time Warner and the other traditional telecommunications and media companies.

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