February 5, 2008

Microsoft, Yahoo, and innovation

Bill Burnham argues that a Microsoft/Yahoo merger would drive down M&A prices. Marc Andreesen disagrees. His argument is essentially twofold:

Microsoft and Yahoo were never more than a small part of the exit opportunity anyway.
A merged Microsoft/Yahoo will be so slow-moving it will create more opportunities for competition than it destroys.

Andreesen certainly knows about slow-moving behemoths making wasted acquisitions; Netscape was acquired by two companies (AOL and Sun) that both dribbled away the parts they respectively acquired.* However, I think he and a lot of other observers are missing something this time — the Microsoft/Yahoo synergies are too large to ignore.

*The legalities of the merger were a lot more complicated than that, but in essence AOL got the “internet” piece of Netscape and Sun got the enterprise side.

Given the opportunity, here are some reasons I think integration would go a lot better than most people think:

Search relevancy algorithms are essentially collections of clever tricks, tested against actual search indexes and results. Integrating two companies’ operations in that regard shouldn’t be hard.
The same goes for algorithms to determine contextual relevancy for ads.
Microsoft has a lot of resources to reinvent the search interface. Yahoo isn’t much of a player there. Not a big integration problem.
The next successful marketing campaign for a search engine — other than search box placement and word of mouth — will be the first one. Merger integration is the least of the problems in that area.
The same goes for most other marketing of online services.
Antispam — see search algorithms.
Integration of web search, enterprise search, email, instant messaging, group chat, other social networking, and a partridge in a pear tree — OK, I admit it, this one is both central to my synergy argument and easy to screw up. But painful though it will be, I think Microsoft/Yahoo is more likely to do it right than anybody else is. I hope my reasons for thinking that will become clearer as I spell out what “doing it right” actually entails.

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