Intelligent Enterprise

Microsoft's bid for Yahoo is certain to shake up the online advertising, Web 2.0 and open-source markets. Yahoo has been on the path to being a real player in the Web and open source world. They've released tons of code via their developer programs and pushed some really innovative services aimed at Web developers. Being absorbed into Microsoft could actually hurt the industry in these areas. I'd expect less open source support out of them for a start.

There's definitely going to be cost-cutting after the deal is done. There are some specific quotes from Microsoft's offer worth highlighting.

MSFT: "Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity."

This means: "We're going to fire the legal department, the HR departments and all the accountants."

MSFT: "Additionally, the combination allows us to consolidate capital spending."

This means: "We're cutting the IT budget." Which implies layoffs, too.

MSFT: "The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform."

This means: "Half the search R&D team goes. We don't know which half yet."

This might be a good time to look for real estate within driving distance of Yahoo's offices. Once the bloodletting starts, it's not going to be pretty. At least there will be lots of talented developers on the market in the near future.

If you look at Microsoft's rationale as explained by Steve Ballmer, it's all about online advertising revenue and search. Microsoft's financials in the online services area aren't pretty. Roughly $3 billion in revenue and they lost almost $1 billion. Combining with Yahoo makes the revenue much bigger and narrows the losses. The challenge facing the companies will be how to merge multiple online properties built on completely different technologies, including the search and advertising engines. Microsoft hasn't had great success in that arena. You only need to look at the history of Hotmail.

This isn't as much about the services as it is about advertising. Yahoo has a big advertising business, and last year bought RightMedia. Microsoft acquired advertising network aQuantive for $6 billion last May. Add the Yahoo advertising business to Microsoft's online services and the combined advertising is nearly $10 billion. The big draw for advertisers will be the huge amount of consumer traffic that goes through Yahoo. According to traffic statistics, it amounts to about 10%-12% of US Internet traffic depending on who you look at. The deal is really all about chasing Google's success in online advertising.

Don't believe me? Here's a quote: "This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale." i.e. "We hate seeing Google make all that money in advertising."

Yahoo has been doing a lot lately in the online media business, particularly music. This is a muddy area where Microsoft has played almost completely against consumer interests with non-starters like Plays for Sure and the Zune mp3 player. It will be interesting to see where they take this part of the business. They said "Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced." A cynic could read that as "We're going to dump our online services staff but we'll keep our management."

Given that this deal is all about online advertising and traffic and hints at lots of layoffs and consolidation, it's probably a good bet that many of Yahoo's novel online services and open source contributions will be low on the management attention list. It probably spells doom for things like the open source Yahoo-IBM search software released last year.

This could be an unhealthy merger. The cultures between the two companies and the way they've been managed are different. Yahoo hasn't been successful with search any more than Microsoft. There are significant product and partnership overlaps. Both Yahoo and Microsoft have a lot of partnerships that will have to be ended to make the merger work. On the bright side, Yahoo's massive traffic numbers guarantee some level of success in advertising, which is what this deal is all about in the first place.