Microsoft Acquires Yahoo! – A good strategy?

Microsoft sent out the warning message this Monday to Yahoo’s board of directors, reasserting its proposal to acquire Yahoo!, and citing a deadline of three weeks for Yahoo’s consideration of the proposal.

Many people regard this as a bold move on Microsoft’s part to escalate its head-on competition with the number-one player in the Internet advertising field, Google. But . . . is it a good move?

Google’s success in the lucrative online advertising market rests on one single word: innovation. Yahoo is losing its market share to this tough player due to its own failure to compete in terms of innovation. And so is Microsoft.

Innovation: A Key Consideration

Innovation has nothing to do with the size of the player, nor its predominant market share. Note that Microsoft’s primary motivation in acquiring Yahoo is the direct inception of its well-established market presence, including a number of successful services serving the Internet community, such as Yahoo! Mail and Yahoo! Answers, as well as portal services such as Yahoo! Finance and Yahoo! News. But this motivation does not hit the main point of this argument: There is no leverage of innovation in this acquisition.

Microsoft’s success in its predominant strategy for dealing with competitors has seldom hinged on innovation. Its usual strategy for outpacing its competitors is either by beating the competitors through its dominant market share in other related services/products, or simply acquiring them in order to kill the competition. And perhaps this is the reason Microsoft has faced so many anti-competitive legal proceedings both in the United States and Europe.

For this reason, the combination of these two players, Microsoft and Yahoo!, could never increase Microsoft’s competing power against Google.

Google’s Use of Innovation

If you take a look at Google’s history, Google’s success can be attributed to the clever deployment of innovative services. Consider the following examples:

1) Google’s first success was the ranking algorithm of its indexed web pages based on inbound links from other websites. This algorithm is based on the PhD thesis written by Google’s two founders: Larry Page and Sergey Brin. The search results of this algorithm are excellent. Many users switched to using Google as their primary search engine instead of Yahoo because of its superior relevant search results. Google now commands more than 57% of the US search engine market share.

2) Google moved to use contextual text advertisements as opposed to traditional graphical based advertisements, successfully raising the click-through rate of the advertisements it holds for its clients. This is a vital move in Google’s history as contextual based advertising creates strong revenue streams for Google. And it literally proved that text-based online advertisement is indeed more effective than graphical ones such as banner advertisements.

3) Google further increases contextual advertisement exposure by introducing a well-accepted program for most website owners: Google’s Adsense program. This program allows a website owner to post Google’s contextual advertisements on his or her website. Google then charges its client for successful clicks on those contextual advertisements, and shares the commission with the owner of the website on which the ads were posted. Google makes this “pay-per-click” form of advertisement the defacto standard online advertising program. While Google is not the first company who promoted this form of advertising (Overture, now part of Yahoo, used this technique before Google), Google is the most successful at administering it.

4) Google stunned the industry back in 2004 when it offered its Gmail service with a user’s mailbox size of 1GB, capturing a large share of online email users. In this strategic service, Google is able to further expand its exposure of online advertisement to email users. The offering was so successful that it forced Yahoo! Mail and Microsoft’s Hotmail to offer comparable services in order to keep their customers.

5) Google offers other excellent services such as: Google Earths, Picasa, Google Docs, Google Analytics, Google Desktops, Google Videos (which is about to merge with Youtube). These services work to encourage various types of Internet users to use Google’s services. Some, such as Google Docs, are even targeting corporate customers, which promises to convert to excellent revenue sources in the future.

6) Google moved into the battlefield of mobile platforms earlier than any of its rivals except Microsoft. But Google’s eye is not on the license fee of the operating system, but on mobile advertisements. Google started the Open Source operating system Android for mobile phone manufacturers, offered for free in exchange for mobile advertisement exposures. Google takes a serious look at the growing trend of users’ online activities on mobile platforms and makes its move into this market aggressively.

To further illustrate Google’s commitment to innovation, take a look at http://labs.google.com. Here you can see they have a pile line of many products and services for online users. Each is targeting the specific needs of online customers in an innovative way.

Can the Microsoft / Yahoo! Combination Compare?

When you look back at Yahoo and Microsoft, there is no way they can compare with Google’s excellent work and work-to-be in innovative services. Google wins over Microsoft and Yahoo! through its people and clever strategies, not simply by a dominating presence in the market (though Google is already the market leader in many online services).

From that perspective, there is absolutely no leverage in Microsoft’s acquisition of Yahoo!. Google’s heavy objection to the acquisition is perhaps an over-reaction. Maybe the merger of these two Internet giants is good for Google. The uncertainties involved in a huge merger such as the difficulties of merging two companies of totally different corporate cultures, the possibility of “brain drain” for those involved in the merger, and the significant cost of the integration process could help Google defeat these two rivals altogether. Isn’t this a good piece of news for Google?

Tags: Overture, Google Labs, Microsoft acquires Yahoo!