The deal: What's to become of Yahoo services?

IDG News Service — Fri, 01 Feb 2008 15:30:40 -0800

While the marriage of Microsoft and Yahoo may make sense for the online advertising fortunes of both companies, what's to become of all the services the two companies have in common?

If you've gotten used to Yahoo Mail, Yahoo Finance, or Yahoo Groups, you have to be wondering if those would go away or become MSN services with a Microsoft acquisition. Will Yahoo's Messenger instant messaging, for instance, vanish and become part of MSN Messenger IM?

There are many more examples of Yahoo services that overlap with Microsoft services, including Yahoo News, Mail, Maps, Mobile, Shopping, IM, and Travel. Some of Yahoo's acquired properties may be considered overlaps, too--sites like the del.icio.us social bookmarking site, the Flickr photo site and the MusicMatch site. The list of services goes on and on--both companies have nurtured massive internet portals with tons of separate services.

IDC analyst Karsten Weide, an analyst with IDC, says Microsoft should think twice before shutting down or slapping an MSN label on the Yahoo services. "In general, I think Microsoft would be well advised to keep the Yahoo brand, and merge their media properties--i.e., MSN and the Windows Live services--into Yahoo." "That's because Yahoo is a stronger brand in the media world, and also their services are, for the most part, bigger than Microsoft's," Weide explains.

History's Guide

The truth is, nobody really knows what Microsoft would do with all the Yahoo services if an acquisition takes place.

But history gives some hints. In the past, Microsoft has been far more likely to buy technology, user bases, and traffic, but not brands. In other words, Microsoft likes to promote its own homegrown brands , like Microsoft Office or Windows Live, not brands that it has acquired.

Microsoft is likely to take that same approach to at least some of the Yahoo services, that is, subsume the people and technology behind the Yahoo services into its own MSN services. Microsoft says it can gain US$1 billion in "synergies" from the deal. By that the software giant means the resources that can be saved as the two companies remove the redundancies from the combined business.

IDC's Weide says Microsoft should resist clinging to its own MSN-branded services, if the acquisition takes place. "Microsoft would have a hard time doing that, because they are not a media company, they are an engineering company," IDC's Weide says. "Meanwhile, Yahoo has a lot of experience in media."

Too Many Services?

There's also the question of focus. Even before the blockbuster bid from Microsoft came in, analysts were criticizing Yahoo for trying to offer too many services at once. Yahoo also this week announced it would lay off hundreds of its 14,000 employees and today, Terry Semel, the chair of the Yahoo board of directors, stepped down.

During a recent conference call with investors, Yahoo executives suggested they would spend less time and energy on photo services, social networking, podcasts, music, and PC calling tools (VoIP), among others. This gives some hint at which parts of Yahoo's business are, or aren't, really contributing to the company's bottom line, and thus may not survive an acquisition.

Analysts' first take on the mammoth acquisition, if it comes to pass, is that Microsoft needs Yahoo's search traffic to gain the critical mass it needs to compete with Google. Right now, Google controls about 60 percent of U.S. search traffic, while a combined Microsoft and Yahoo would have about 33 percent, according to comScore's Media Matrix.

So when it comes to overlapping services, Microsoft is likely to take a shrewd view of the Yahoo services that do and don't deliver the traffic. For the ones that do, like Search, Mail, News and Finance, Microsoft might be more willing to keep them going concurrently with its own with the Yahoo brand left on them. But the others--the ones Microsoft doesn't see as having a direct impact on its advertising business--might be subsumed by existing Microsoft services or discontinued entirely.

Many analysts Friday expressed doubts about the deal. "Our initial view of the proposed transaction is cautious," writes Bear Stearns equities analyst John DiFucci in a research note Friday. "We believe that a large acquisition of this size is fraught with risks broadly defined as potential integration issues with employees, cultures, and customers."