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Is Yahoo the right mate for Microsoft? Yes...

This is a period of software colonization and Yahoo is key to Microsoft's aspirations in the Internet age.

New friends? Steve Ballmer and Jerry Yang

With Microsoft's pursuit of Google...I mean Yahoo...going into the end game, some are questioning the wisdom of plunking down about $45 billion on such a prize. Last week, Robert Breza, an analyst with RBC Capital Market, made the case for Microsoft chipping away at Google's search/ad lead in a less desperate manner with its adCenter platform, and instead investing the billions in business applications and social networking. Michael A. Cusumano, professor at the Sloan School of Management at MIT, recommends that Microsoft stay closer to its business software roots and acquire SAP. This advice won't provide much relief for Yahoo CEO and co-founder Jerry Yang.

Breza and Cusumano both make solid arguments but discount or miss what is going on as the Internet scales from a billion users to the entire planet. This is the period of software colonization, a land grab for consumers and businesses. Microsoft has realized that failing to make inroads in search and to annex more territory (users) and engineers (an army to build out and protect its colonies) could be fatal in the long run. Microsoft's future--Windows Live--is dependent on reaching billions of users, and providing monetizable services, ranging from a cloud-based Office to virtual games. And if it is successful in integrating Yahoo, which is not assured, the money will flow to make substantial acquisitions in other parts of its business.

For reference, Breza stated:

Currently, Microsoft doesn't have the scale in their search advertising platform, and this lack of scale has slowed them from making the "killer app" that combines one platform for users to target search, display, in-game, mobile, voice, and video marketing. These are all previous investments that depend on SCALE to make any further platform integrations reasonable. Online advertisers are ingrained in Google and Yahoo! platforms. Getting advertisers to spend on the additional overhead for a platform that is a distant third place in terms of search is a difficult task (it's been difficult for Yahoo which is a distant second).

It's possible to argue that without YHOO and a blank check for $45B, Microsoft could make investments that would bring scale over time, and also more synergies beyond just advertising. Salesforce.com at 100% premium is $12B, Omniture at 100% premium is $3B; and that leaves $30B to acquire Facebook. It could be argued that adapting/integrating these platforms with adCenter would bring advertisers/scale to the markets these businesses already serve (business and gen-x-y-z).

As Larry Dignan of ZDNet expressed it, "What opportunities will Microsoft forgo as it tries to integrate Yahoo?"

Clearly, it's a matter of priorities, and Microsoft views battling Google as the more strategic one. And, it's far more risky than adding a Salesforce.com to the mix. Yahoo could be a 1+1 = 1.5 integration nightmare, and Google would continue to grow its share of the search market. Microsoft would get half a billion users, but not necessarily their loyalty.

Randall Stross wrote the story in the New York Times citing Cusumano's idea that Microsoft swap Yahoo for SAP. He wrote:

Determined to match Google in search and online advertising, Microsoft has managed to overlook a plain-vanilla strategy, the oldest one in the book: build on its own strengths. What it does best is to sell software to corporations, for all sorts of applications, visible and not so visible, at a handsome profit.

If Microsoft thinks this is the right time to try a major acquisition on a scale it has never tried before, it should not pursue Yahoo. Rather, it should acquire another major player in business software, merging Microsoft's strength with that of another. This is more likely to produce a happier outcome than yoking two ailing businesses, Yahoo's and its own online offerings, and hoping for a miracle.

SAP, which would cost well above $60 billion, would be a reasonable acquisition for Microsoft. The two had discussions in 2003 regarding an acquisition to compete more effectively for large enterprise budgets versus Oracle, which since has brilliantly rolled up the enterprise application and middleware industry.

It's a matter of businesses priorities, and you have to credit the aging Microsoft warriors--Gates, Ballmer, Mundie, and Ozzie--for choosing the path less well traveled but the one that could have more significant impact.

Of course, there is the fear of what happens if Microsoft, or Google, is successful in colonizing a larger portion of the Internet.