Microsoft / Yahoo! — Why the deal won’t fly

Seriously, what possesses Steve Ballmer? Why risk his reputation, to say nothing of his shareholders’ well-being? Let’s forget the easy jibes, big egos, phallic insecurity.
Instead, let’s ask ourselves: What does the Microsoft Board of Directors know we don’t know?
They can’t be ill-informed, ill-advised, ill-intentioned or dumb. And yet, there are many obvious or should be obvious reasons why this forced marriage can’t work.

Technical, first. Microsoft uses Microsoft software, mostly. Yahoo uses Linux servers and applications, some Oracle bits. So, how do you “converge” mail, search, advertising services, shopping, instant messages? In the Valley we joke, at our own expense, saying much money has been lost because we said: It will work because it’d be cool if it did. Well, too often, it doesn’t. Do you want the job of merging two huge and already messy computing infrastructures?
Declaring a winner-take-all is a possible solution. Awright guys, everybody moves on this ship. You tell Yahoo Mail and Messenger customers their accounts are now on the new Hotmail at Same user name and password and, for you, we redirect your old login automagically. Sounds easy. But moving millions of email accounts, billions of messages may be of such as scale as to be intractable. Users rarely respond well to being forced to switch. The welcome screens on Yahoo and on Microsoft’s feel very different and most users are reluctant to change their habits, especially when there is no clear benefit to doing so. So, now, multiply the technical and behavioral difficulties by the number of different platforms, portals, advertising systems, shopping sites, news, maps and search that have to be unified for the merger to work, to help MicroHoo become Number One. Microsoft directors are well aware of the challenge. That’s just the beginning.

We now turn to Culture Wars. Many in the Valley’s venture capital business rub their hand with glee. Boy, we had so much trouble getting engineers, marketing and sales people. We’re philanthropists, you see, this deal makes staffing our start-ups easier – and cheaper. Yes, here too, Ballmer sees the problem: in his letter to Yahoo he mentions “retention packages” for Yahoo “key personnel”. Does Steve refer to executives churning out PowerPoint slides or to the engineer in a cubicle who performs actual work, who knows where the corpses are buried in the source code? Techies have already kick-started the word processor and warmed-up their résumé.In Mountain View, it’s Christmas in January, wags want their company to change its name to Giggle. One individual calls the happy hallway gossip “cluster cluck”, delicate rhyming allusion to a more vulgar expression often used to describe such mergers, a cluster f–k.

Summarizing: Yahoo shareholders (and executives) take the money and run. Merged computer systems won’t run. Culture wars cause an exodus of real workers. VCs rejoice. Goggle giggles.Microsoft directors know this and still support Ballmer’s takeover of Yahoo. Why?
There aren’t many possible explanations. The simplest is this: We’re screwed. One, we can’t catch up with Google as we know it today. Two, we see Google’s long term strategy. They have the best large scale computer system on Earth (more than one million servers early 2008, running better than we know how to). Over time, with this “computer cloud”, Google offers (sells or sells advertising with) everyday services for people and businesses. This takes gold away from the Divine Earnings Stream: Office and Windows. More than $3bn, last quarter for applications alone, as much as Google’s total profit for one year.
One has to admire Microsoft’s Board for doing what too few Boards do: real strategy. Yes, we make tons of money today but, from 10,000 feet high, we see the torpedoes. Too bad doing what we do won’t help, even with more money skill and energy, but that’s the way it is. We’re left with one move: buying the only other competitor left and hope we gain enough muscle to fight the Web’s new Microsoft, Google. It’ll work because it has to work.
“Mere matters of implementation” will get in the way, I’m afraid. – JLG

Further readings :
> The letter from Microsoft board’s to Yahoo’s
> Henri Blodget’s (yes, that’s him, the Internet Bubble repentito) strongly reasoned view, here.
> How Yahoo got lost in rival’s shadow, in the
> In The New York Times, “A giant bid that shows of how tired the giant is”
> The “Peanut Butter Manifesto”. On November 2006, a Yahoo senior vice-president wrote a memo outlining the company’s flaws. Interesting reading in retrospect. Full text on The Wall Street Journal or TechCrunch
> And, the always entertaining and extremely intelligent satire from Fake Steve Jobs

Google and Publicis to team-up

Last week in Paris, Eric Schimdt the CEO of Google, and Maurice Levy, chairman of Publicis Groupe, the n°3 advertising group in the world, disclosed a one year-old cooperation. Although the CEOs did not elaborate; they simply acknowledge loaning employees to each other (depending on the employees, that could mean a lot). It’s a smart move for Publicis, in a depressed French market, its stock gained almost 5% during the week.
> story in Adweek

The will not be free

Rupert has made up his mind : the online edition of the Wall Street Journal will remain a paid-for model – at least for now. Here is the figures : the million subscribers bring each year $60m to Dow Jones. To offset such a loss with advertising would require at least a twofold jump in audience (some analysts say much more). In addition, the could have lost on both ends since he is currently able to charge $60 CPT (cost per thousand) to its advertisers, twice the amount of the usual free-information website. Those math settled the issue. Mr. Murdoch is not ruling out increasing the annual fee to specialized areas of the He has some margin to grow. Consider for instance the French business paper Les Echos that charges the equivalent if $540 a year its web only subscription and $780 if you combine with the paper, versus $65 for the
> story in Business Week
> and in the NY Times

Irreconcilable differences

“We gave Norm an unlimited budget, and he exceeded it”. This is what the CEO of Dow Jones said about Norman Pearlstine, the managing editor of the Wall Street Journal. Well, those days, the eighties, are gone.The increasing antagonism between editors and publishers is a byproduct of the unending financial crisis of the newspaper industry. Journalists see management as a bunch of hopelessly thick beancounters, while CEOs consider editors as budgetary teen-agers, unable to cope with economic reality.
Problem is: they are both right. And for the sake of the industry, they need to make peace. Last week’s firing of the Los Angeles Times editor James O’Shea is a perfect illustration of this increasingly bitter discord. He is the second editor to leave the prestigious American newspaper in two years in a fight over budget cuts. Mr. O’Shea had a budget of $123m for his newsroom. That is approximately four to five times the budget of most European newspapers – where the cuts imposed are more like in the double-digit percentage territory.
Cost cutting vs. product developement
David Hiller, the publisher, wanted a 1% cut. He had some reasons to do so: the LA Times lost 10% of its advertising revenue last year and the entire Tribune Company (which also owns the Chicago Tribune, the Baltimore Sun, Newsday) is on the same track, with, among others things, a sharp decline in classified ads.
Predictably, Mr. O’Shea is arguing otherwise. Like many journalists, he believes that the permanent “shrinking mode” in the print media, will impoverish newspapers and accelerate the readership hemorrhage. On the supply and demand system, he is definitely on the supply side, a side where the facts support Mr. O’Shea. Under his
editorship, he launches several editorial initiatives, which, not only added to the bottom line, but also made the LA Times the only US newspaper to record an increase in its circulation in 2007.
Corollary, in an act of bravado, the editor asked for a $3m raise in his budget, invoking a particularly news-rich year (presidential race, Beijing Olympics). Even though he admitted that he could come up with the required $7m in cuts, Mr. O’Shea didn’t budge. He denounced the way Tribune Co. allocates its resources, not only at the Times but also at all the Tribune newspapers all around the country. In doing so, he escalated a war with its publisher – and was fired.
This dispute epitomizes the need for a cross-pollination between respective managements in the newsroom and the financial area. Most of the time, neither side has a clue on the needs and pressure the other is facing. This problem will grow further as our industry is brutally transforming itself in a J-curve like, where it will be worse before it gets better. This mutual understanding can be only be achieved through strong internal training programs in which executives gain genuin insights into each other’s circumstances. We can dream of a world in which there will be financial management classes in journalism schools. Some publishers envision even more radical approach like tying a part of editorial staff’s salary to the sales of the paper. As long as there is some reciprocity in involving the other side in the strategicchoices of newsgathering, why not.
> a summary of the LA Times dispute, in the Wall Street Journa
> editor James O’Shea’s farewell speech

A month ago, the entire Tribune Company was taken private in a $8.2bn buyout by real-estate magnate Sam Zell. He explains his views.
> story in Chicago Tribune

The Real Davos Talk

To be honest, the talk of the Swiss town was the massive fraud at the French bank Société Générale (for once, we, French, set a world class record in finance, let’s celebrate!)
Seriously now. I think the most interesting speech at this 2008 edition of the World Economic Forum was Bill Gates. Microsoft founder outlined what he called “Creative Capitalism”: the use of market forces to address poor-country needs.
> Gates’ interview in The Wall Street Journal
> and the report from Davos by Fortune
On the same subject, Business Week run a great cover story bluntly titled Can Greed Save Africa. Here.
And in this 2006 New Yorker’s piece, Connie Bruck outlined the connections between high stake entrepreneurship and microcredit. xw

Hedge Fund eyeing on The NY Times

Harbinger Capital Partners, an Alabama-based hedge fund, gave notice Friday that it would try to elect directors to The New York Times Company board. The very same day, Harbinger did the same with Media General, a Virgina based company that owns 25 newspapers and 75 online properties. The Times is almost immune from an unwanted outside push at its board since the Sulzberger family controls 9 of the 13 directors. But no doubt that pressure will grow.
> Story in The NY Times

The power of Visual Information

Have you ever tried to captivate you teenager’s attention on esoteric notions like global macro-economic issues ? Before giving-up : try this. Gapminder is specialized in animated graphical representation of various data. Not surprisingly the company was acquired by Google last year.

> see a representation of income per capita by country between 1975 and 2004, here. (Look at the tiny country thats falls sharply and bounces back : it is Rwanda).