Microhoo allows economies of scale? Ho-hum

The Microsoft-Yahoo! deal is worth billions, but it's still not that exciting. Here's why.

By now, we've all heard: nearly a year and a half to the day Microsoft first tried to take Yahoo to bed, the pair have finally completed their prenup negotiations and gotten hitched. For both of these companies, this is a big deal. Yahoo! gives Microsoft the opportunity to crack double digit search share. Microsoft gives Yahoo! some significant cash, according to GigaOm:

Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million.

The partnership is receiving mixed reactions from observers. Sue Zeidler at Reuters points out that advertisers are pretty psyched about it. Saul Hansell at The New York Times points out that Microsoft is best poised to benefit from the deal, but that Google is unlikely to feel any pain. Arnold Zafra from Search Engine Journal makes the reasonably self-evident observation that number 2 is better than number 3. And Steven Shankland from CNet points out that investors, well, they don't seem very happy. A ten-year deal worth billions is important to any organization, regardless of size, so I feel a bit cheeky proposing that there's a bigger picture -- and yet, I find myself strangely unmoved. Here's why:

  1. The partnership doesn't fundamentally change the search landscape for the consumer.

    Back when Microsoft was first trying to buy Yahoo, Erik Qualman at Search Engine Watch pointed out that combining the two would be "analogous to the second- and third-place runners in a sprint tying their legs together in a hope to catch the leader."

    The benefits to GAAP and capital expenditure and operating cash flow are accounting benefits, not consumer benefits. From the consumer perspective, you still go to your Google home page or your MSN home page or your Yahoo! home page. There is little incentive to change any kind of habit.

  2. The partnership doesn't represent any sort of innovation.

    This is not a story about product development, creative invention, or a vision of the future. It's a story in which we're bringing down costs (a necessary but finite way of improving results). It's also a story in which the large incremental increase in Microsoft's market share doesn't hold much promise of additional growth.

  3. The partnership doesn't explain how Yahoo! is going to revive the fading tarnish of its brand.

    In the same CNet article I mentioned above, Shankland says the deal is great because it allows Yahoo! and Microsoft the freedom to focus on their "new selves". Those new selves may or may not be exciting, but that assessment makes this deal sound like a troublesome irritation to be swiftly dispatched, not a powerful alliance poised for growth.

For all its speed, the online community can be slow-moving. We can adopt new technologies at an incredible pace, but we can also form deeply ingrained habits that would take years -- or a completely different framework -- to undo. These habits mean that, as far as traditional search goes, the market pie has pretty much been allocated. Two people sharing their pieces don't impact the rest of the pie. So, no, this deal doesn't make my jaw drop or my heart skip a beat. I'm hoarding my excitement, waiting for the day when Microhoo launch their "new selves" -- and hoping that they're worth getting excited about. What do you think?

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Copyright © 2009 IDG Communications, Inc.

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