It might have been best to comment on the Yahoo Microsoft deal until tomorrow when Yahoo's Q1 Earnings Report comes out. But the key numbers already tell a pretty clear story: Google has outspent Yahoo on R&D, 2.3:1, and generated operating cash flow at a rate of 2.7:1 compared to Yahoo (caveat: I'm comparing Google's Q1 numbers to Yahoo's last Q4 numbers based on Financial Times' coverage from last week). When it comes to cash, the contrast is even more striking: Google's cash is 6 times as large as its competitor. According to Attributor's analysis of content monetization across 68 million domains, the combination of Google and Doubleclick have almost 69% market share in monthly unique users versus Yahoo's 12% and MSN's 10%. The difference is even larger if market share is reviewed in the context of unique domains.
While Yahoo could really use a partner like Microsoft with deep pockets, R&D strength, Microsoft is running out of major players to buy or partner with to stay competitive in this space. I find it extremely hard to imagine how either party could simply let this deal not materialize. They both have too much to lose.
Tomorrow's Q1 earnings report will be interesting to watch but is unlikely to change the fundamental dynamics significantly. Silicon Valley Insider has actually gone through the trouble of running through a number of scenarios in great detail here.
In the meantime, Yahoo keeps bleeding executive talent, including senior old-timer engineers like Eric Boyd who recently defected to Mochi Media. It's painfully clear that steering Yahoo to be a media company in the past worked disastrously for the company. What's even worse is the hesitation to sharply return to the company's roots and be more engineering / product focused. Given Google's razor sharp focus on improving its core products and relentless drive to excel in key technical areas, maybe the real picture is even worse than the one painted above by the sheer numbers.
I'm not an anti-Microsoft fanatic, but an acquisition of Yahoo by Microsoft will destroy most of the value in the company. At least Yahoo is profitable, now; it's an illusion to think that because Google is even more profitable, somehow that makes it good for Yahoo if it's destroyed by a takeover.
(If you think it's significant that Eric Boyd is leaving, just try to imagine the rush for the doors if Microsoft does get its way. Or maybe they will bribe some people to stay for a couple more years, but that's not a way to build a successful company.)
I can understand why the merger will probably happen anyway. The decision is made by Yahoo shareholders, who want the cash, not by people with a longer-term interest in what happens to the business. (This is exactly why Larry and Sergey created two classes of Google stock; thinking about the fact that, but for the grace of God, Google could be where Yahoo is now, makes them seem prescient and Jerry and David to have missed a trick.) But we should be honest about what's happening and the consequences.
Posted by: David desJardins | April 21, 2008 at 10:36 PM