ChaseandSam.com

What a whirlwind week in tech! Earlier this week Amazon shelled out 300 million to buy Audible.com, and this morning we have news that Microsoft has made a 44 billion dollar offer to buy Yahoo.com. If this purchase ultimately goes through, it will be a huge misstep for Microsoft - perhaps even a fatal one, as it will hang three very heavy albatrosses around their neck. The fact is that this purchase would give Microsoft three under performing areas that will be exceedingly difficult to keep from dragging them down.

Here they are in order from least damaging to most damaging:

1. HD-DVD. At this point, Microsoft and Toshiba are the two biggest backers of Hd-Dvd. In many circles it is rumored that Microsoft was actually the financier behind Paramount and Dreamwork’s Summer 2007 decision to go Hd-DVD exclusive. The Par and Dreamworks deal was a huge boon to Hd-DVD, however, any momentum that they gained from that deal was killed in early January when it was announced that both Warner Brothers and New Line Cinema would be backing Blu-Ray only. The New York Times has speculated that this announcement would be the death stroke to HD-DVD, and it is indeed looking like a very strong possibility. Interestingly, it appears that Paramount and Dreamworks have an escape clause in their contract with HD-DVD whereby they can pull out if Warner Brothers goes exclusively with Blu-Ray. Reuters is speculating that is what will happen, but it has not happened yet. Oh, by the way - Blu-Ray outsold HD-DVD by almost two to one last year.

How does this hurt Microsoft? For one, it hurts them because this is the format that they are backing, and it looks like it will be a loser. Backing an industry loser is not a huge weight, but if Microsoft did indeed send hundreds of millions towards Paramount/Dreamworks, then it has to hurt the company somewhat. I don’t buy the conspiracy theory that M$oft is promoting HD-DVD against the clearly superior alternative (Blu-Ray) so that both formats will fail, and MS will come out with a downloadable digital HD format. I don’t buy it mainly because our internet bandwidth in the U.S. isn’t ready to support HD downloads. Albatross weight: light to medium.

2. Yahoo acquisition. Yes, as noted below, I do realize that Microsoft uniting with Yahoo represents Google’s two largest competitors joining together, and sometimes when it comes to dethroning a champion it is best to cooperate. In this case, however - I think the merger will fail on all counts if the goal is to take Google down. If we can see this as a heavyweight boxing match of sorts, then the merger of Google and Microsoft can be seen as Yahoo climbing on Microsoft’s shoulders in order to fight Google. Yes - MicroYahoo will be taller and weigh more, but they will likely be top heavy and clumsy, and Google will be able to beat them even worse than before. Why is that? Because the Yahoo/Microsoft merger does very little to improve either company. Search Engines - Nope, Microsoft’s Live Search has hardly made a splash, and Yahoo’s search is still steadily ceding market share to Google. Currently (link is a pdf), Google controls a little over 56 percent of all internet searches, Yahoo has a little over 17, and Microsoft around 13 - so after the merger, Google will still have an almost 2-1 advantage over MicroYahoo, and with no signs of any real innovation from either company - Google will likely maintain that lead for years to come. Keep in mind that as of 2006, Yahoo had a 30 percent share in internet searches…they’ve lost a lot of ground in less than two years!

What about traffic (buns on seats)? True - Yahoo represents the number three internet site right now, (link goes to another pdf) and Microsoft’s properties are number two, so this merger could see them become the number one overall web destination by parent company, but merely having traffic does not represent monetization, and Google is killing both companies in terms of traffic monetization. Ad Networks? Neither Yahoo’s Contextual Ad program nor Microsoft’s have anything that can even remotely rival Google’s Adsense, and combining two mediocre networks isn’t likely to produce one great network.

The fact is that both Yahoo (who only gained 8 percent in revenue over 2006) and Microsoft (who’s online division actually LOST money in 2007) are struggling to stay fully competitive online, and neither has strengths in the appropriate places to balance each other’s weaknesses. How does Microsoft Office (a strength) help Yahoo compete better online? It doesn’t! How does Yahoo’s traffic numbers (strength) help Microsoft, if Yahoo is struggling to turn a profit with them (they are laying off hundreds this month), and Microsoft is LOOSING money online? Again - it doesn’t help! Albatross weight: medium

3. Vista. Here’s the biggest Albatross of all - and it’s a big one. I’ll not spend a lot of ink…characters here on Vista, because most neutral observers realize what a problem Vista is to Microsoft. Will Vista turn a profit? Almost certainly - but it will be a pyrrhic profit - over the next few years people’s frustration with Vista and its performance problems and many aggravations will lead to a steady trickle of consumers who will patronize Apple (or even Linux) for the first time. And once you go Apple…you never go back. Did you know, by the way, that Windows XP is twice as fast as Vista? You don’t do that sort of thing to consumers and hope to ever get away with it! Anybody that has followed our tech career over the years knows that we aren’t Apple fanboys - in fact, I’m typing this from a Vista computer - but the handwriting is clearly on the wall. Microsoft’s OS dominance, much like Yahoo’s portal dominance of only a few years ago, is slipping, and will likely continue slipping. Albatross weight: heavy, and growing heavier.

In sum - I’m proposing that Microsoft could become too weighted down from the Yahoo acquisition to thrive -and if a software company doesn’t thrive for a few years in a row, it will ultimately shrivel up and die a slow death, or at least fall from dominance.

Not to be too negative to the boys in Redmond, here are three ways they could eventually overcome the weight of these three associations, and turn the Yahoo acquisition into a positive:

1. Google is apparently faltering, and this merger of two it its biggest rivals could have an avalanche like effect in causing the small falter to become a big stumble. It should be worth noting, however that Google’s falter is what most companies would call a success. Their fourth quarter earnings from 2006 to 2007 show a 51 percent increase, and that small of an increase caused a slight investor panic. I’d rather see a 51 percent increase, however than Yahoo’s 8 percent increase over the same period (see above) and Microsoft’s net online loss.

2. Yahoo email and sports sites - Fantasy, Rivals, etc. Give Yahoo credit - they do a good job at email, and have tons of email customers. As Google’s monetization of Gmail has shown, it is possible to make a lot of money via free email programs.Yahoo is also very strong at sports - particularly college sports coverage (through the Rivals.com network) and Fantasy Sports - both of which are huge business. I’d consider those two things the most attractive plums available at Yahoo, and who knows - Microsoft could possibly expand them and make them more profitable, right? Though, looking through their list of past acquisitions, I sort of doubt it.

3. Gaming - both Xbox 360 and PC. Why do I keep a Microsoft computer around the house? The simple answer is gaming - I’m a computer gamer from way back, and I’ll not fully make the switch to Apple until Apple gaming comes around, or until PC gaming dies, which it may well do, thanks to piracy. Microsoft has done a decent job with the 360 (rings of death notwithstanding), and this hardware, and the subsequent gaming sales based around it (Halo, etc) could keep the company riding high for the next few years much the same as the iPod has done for Apple. I would like to see a resurgence in PC gaming, however, and what better company to lead that than Microsoft - and perhaps with their acquisition of Yahoo, they could spread the word about the PC gaming resurgence even deeper.

Thanks for reading, and hey - do yourself a favor and vote for Ron Paul!

-Chase

Please leave your opinion in the comments section, and I’ll integrate the best ones into a follow up article down the road.