Playing out Microsoft's online strategy

Latest rumor is that it could sign a search ad deal this week with Yahoo to thwart Google, acquire Yahoo as pressure mounts from shareholders, then acquire Facebook.

The latest wild rumor circulating is that after doing a search ad deal with Yahoo, Microsoft will spend its cash acquiring Facebook for $15 billion to $20 billion.

At a press conference in Tokyo on Monday, Facebook CEO Mark Zuckerberg was asked about Facebook's future as a standalone company. "You can tell, from our history and what we've done, that we really wanted to keep the company independent, by focusing on building and focusing on the long term," Reuters reported.

Zuckerberg declined to comment on a follow-up question regarding the prospect of a sale. Microsoft invested $240 million to acquire 1.5 percent of Facebook at a $15 billion valuation. After walking away from the negotiating table with Yahoo, Microsoft's bankers supposedly had some conversations with Facebook about an acquisition.

Microsoft has not lost its lust for Facebook, which would be a much cleaner acquisition than Yahoo and provide a lot of ad inventory, though social-network advertising isn't as lucrative as search.

Here's some of the logic trail that could lead Microsoft to the conclusion that it could end up with deals for both Yahoo and Facebook. This can be viewed in the context of the four pillars of Microsoft's online strategy :

  1. Consolidate ad platform and win in display
  2. Innovate and disrupt in search
  3. Deliver end-to-end user experiences across the PC, the phone, and the Web
  4. Reinvent portal and social-media experiences

• Yahoo was surprised when Microsoft walked away from the table. Yahoo wanted $37 per share, and it threw the Google ad deal in Microsoft's face, so CEO Steve Ballmer withdrew his $33-per-share offer. Miscalculation on Yahoo's part.

• Since then, Yahoo shareholder lawsuits, plus Carl Icahn's buying up of shares and proposing a complete new board of directors for the July 3 shareholder meeting, have put serious pressure on Yahoo to rethink its stance.

• Doing a deal for Google to sell text search ads on Yahoo's sites would not only bring up possible antitrust issues, but it would also turn off Microsoft.

• Turning off Microsoft by getting in bed with Google would give those influential Yahoo shareholders--as well as disgruntled employees who view an acquisition by Microsoft as the right ending to the saga--more ammunition to fry Yahoo's board. So, it's wiser to keep the door open to Microsoft than to embrace Google to keep Microsoft out of the picture.

• Microsoft seriously needs to ramp up its search ad business. It has a deal with Facebook , but it lost out to Google on AOL and MySpace.com. How about taking over Yahoo's text search ads business as a way to gain inventory and to continue the tough love for Yahoo, which could then lead to a full acquisition, especially in light of Icahn's machinations and the shareholder meeting coming up July 3?

• As a bonus, announce the search ad transaction at Microsoft's Advance08 Advertising Leadership Forum this week.

• As the summer gets into gear, Microsoft will talk to Yahoo shareholders such as Icahn, various intermediaries, and eventually Yahoo, about a union at $33.50 per share.

• There is the chance that Microsoft will cool to a Yahoo acquisition--too many bad memories during the unfulfilled courtship--and just settle for a search ad deal to keep Google at bay. A joint venture for search covering both the search and advertising technology, as well as sales, would be a stronger play versus Google, but that might be hard to execute.

• Microsoft has been attracted to Yahoo for more than its search business. It has engineering talent, 500 million members, and some compelling services that would work across the MSN and Yahoo brands.

• If Microsoft doesn't acquire Yahoo outright, Facebook becomes more enticing. Zuckerberg has said many times that he plans on going public when the time is right.

• However, times have changed. Facebook has found that selling ads on social networks isn't as profitable as selling search ads. The company has reduced its revenue forecast for the year . The growth curve for bringing in new users has slowed somewhat, though Facebook is expanding outside the United States. Competitors such as Google, AOL's Bebo, and MySpace have not gone away, and the notion of data portability means that the walled gardens that keep people fenced into a social network are becoming porous.

• Thus, Zuckerberg & Co. might be more open to taking $15 billion to $20 billion now for their four years of work, rather than taking a chance on an uncertain market. I suspect that is what the elders are telling the Facebook management team.

• Now for the ideal scenario for Microsoft: acquire both Yahoo and Facebook. First, do the search ad deal with Yahoo to pre-empt Google on that front. Over the summer, acquire Yahoo as the pressure builds from shareholders such as Icahn. Finally, as Facebook realizes that its dreams of becoming the next Google are less certain, acquire the social-networking giant.

• If this scenario were to occur, Microsoft would have a lot of online territory. It's not as cheap as the Louisiana Purchase, and it's not clear how Microsoft would integrate and leverage the various platforms and audiences.

The 35-year-old Microsoft has a long-term view, and has been known to be persistent and tenacious. However, it's not clear that by cobbling together and integrating different services, Microsoft can lead the way to Web 3.0.

 

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