Yahoo, in Search of a Miracle

Silicon Valley underdog Yahoo, like the New York Giants just before the Super Bowl, needs a miracle. But there’s no guarantee that Microsoft, which made a $44.6 billion bid to acquire Yahoo, can deliver to the red zone, never mind the end zone.

First, Microsoft’s offer is subject to regulatory review in the United States and the European Union. Don’t forget: until last October, Microsoft was involved in a nine-year battle with European antitrust regulators over the software company’s refusal to share confidential computer code with competitors. Critics, including Google, are already crying foul over Microsoft’s plan.

Even if the deal clears regulatory hurdles and gets the green light from Yahoo’s board and shareholders, multiple challenges await. This week, I tracked down Yahoo alumni to see where they’re placing their bets and how they think the deal will affect online advertising’s future.

“It’s an interesting deal on paper,” says Ellen Siminoff (Yahoo, ’96-’02).”If it gives Yahoo more resources and helps them right the ship, that’s a good thing.” Plus, it would potentially be a strong competitor to Google, a sentiment shared by other Yahoo alum. Ideally, she says, there’d be three strong companies in the market.

Siminoff’s now chair of Efficient Frontier, which manages paid search ad campaigns on Google, Yahoo, and Microsoft. Her company’s internal stats show that for every new dollar spent on search advertising, Google gained 97 cents, Microsoft gained six cents, and Yahoo declined three cents during the last three months of 2007, compared to the same period in 2006.

Integration: Interference

The deal would require massive integration, Siminoff and others warn. “You have [to integrate] people, technology, business practices, and you have to do this during a period when Google is laser-focused and continues to execute without distraction,” Siminoff continues.

Lukas Biewald (Yahoo, ’05-’06), the technical lead on the launch of ranking algorithms for Japan, Germany, and other markets, agrees integration will be a huge undertaking.

That’s because Yahoo and Microsoft each has its own search engine and advertising platforms, developed using different software approaches. Question is, would Microsoft select one engine and one platform and build out from there? Or would it try to take the best features of each and attempt to merge them? “If [Microsoft-Yahoo] can identify the best people and put together the best of both worlds, it would be amazing,” says Biewald, now CEO and founder of Dolores Labs, a data collection company that judges search quality and other tasks.

A 2006 survey by management consultancy Accenture suggests one in two mergers don’t live up to a company’s expectations. Of 400 U.S. and European corporate executives surveyed, 45 percent said their most recent deals achieved expected cost-saving synergies and 51 percent said the deals achieved expected revenue synergies. Only 30 percent said information technology was successfully integrated.

As the world’s largest software company, with $52 billion in annual revenue, Microsoft should have the resources to pull off a humongous integration. Failure could hurt Microsoft’s credibility, in addition to being costly.

An International Play

Is Microsoft interested in Yahoo for its international business? Jerry Shereshewsky (Yahoo, ’98-’07) thinks that’s a distinct possibility. “[Yahoo] would give them the number-one position where the growth is coming from in most emerging markets,” says Shereshewsky, now chief executive of Grandparents.com.

Except for search, where Google dominates, Microsoft-Yahoo would be stronger than Google on other fronts, such as traffic. A combined Microsoft-Yahoo has about 665 million worldwide visitors compared to Google’s 588 million, according to measurement firm comScore’s December 2007 metrics.

Shereshewsky’s all for a Microsoft-Yahoo duo. “It’s a really good thing for Google to get some serious competition,” he says. (For disclosure, he adds, he owns a small number of Yahoo shares. “So few it doesn’t matter,” he says.)

Don’t Stomp Yahoo Down

Some worry that Microsoft’s proposed acquisition of Yahoo could stifle the Silicon Valley company.

“Yahoo desperately needs an infusion of innovation, speed to market, and creativity. It needs to fan the embers of those attributes…and find creative new uses of interactive marketing. The downside is I don’t think Microsoft brings that to Yahoo,” says Jeff Weitzman (Yahoo, ’98-’02), now CMO of Coupons Inc..

The union would work if Microsoft encourages Yahoo to return to its roots, which include brand building and technology innovation.

Under what scenario, then, does the duo succeed? Microsoft lets Google dominate search advertising. Then, it builds on Yahoo’s strength in display advertising and brand building. Because TV is all about branding, Weitzman theorizes that television ad dollars will flow to interactive, display, or other creative forms instead of search.

Indeed, Yahoo has outperformed Google in display advertising, recording 18.8 percent of all display ad page views compared to Google’s 1 percent share in November 2007, according to comScore.

Worst case, Microsoft attempts to out-Google Google in search. “If the industry spends a year or two fighting it out for search dollars, we’ll have to wait for a new generation of companies to do really creative branding and promotions,” Weitzman says. “Yahoo loses and gets used…The Internet loses.”

Join us for SES London February 19-21 and for training classes on February 22.

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