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Weekly Column

The Men Behind the Curtain: What's really happening in the proposed Microsoft-Yahoo merger.

Status: [CLOSED] comments (79)
By Robert X. Cringely
bob@cringely.com

It's a challenge for a journalist coming late to a story like Microsoft's proposed acquisition of Yahoo. I had literally just pressed the SEND key on last week's column when news hit the wire. What to do? The way things are structured at PBS I couldn't just pump out another column (that structure may be changing by the way), so the big question was whether the passage of seven days would make pointless anything I would have to say. So I waited and waited, and it is a testament to the shallowness and endless repetition of both the tech and business media that there is still plenty to say about the deal, the true nature of which few people yet understand.

Pundits and industry analysts have been holding forth on whether the $44.6 billion merger will go forward and what it will mean to the Internet, while financial markets have been answering the same questions through the changing price of each company's stock and that of their competitors. Yet nobody seems to be explaining why these two outfits need each other, which has little to do with market share or Google and everything to do with corporate psychology.

Were they cast as characters in The Wizard of Oz, Yahoo would play the Cowardly Lion and Microsoft the Tin Woodman. No Scarecrow would be required since there are plenty of brains at each company to go around.

Yahoo has been adrift, the story goes, unable to compete with Google, its search provider in earlier days. Tim Koogle, the company's first professional CEO, couldn't steer the ship, so he was replaced with Hollywood stalwart Terry Semel, who built an empire but didn't do much to change the company's course. Now Semel is gone, replaced by company co-founder Jerry Yang, who isn't moving fast enough for Wall Street, that's for sure. But what is it that all these very smart executives at Yahoo have actually been fighting against? Though they probably don't realize it, their boogeyman is Mark Cuban, the billionaire owner of the Dallas Mavericks NBA team, the HDNet satellite and cable TV channels, and many other toys.

The basis of Cuban's considerable fortune was his 1999 sale of Broadcast.com for $5.7 billion in Yahoo stock that Cuban and his partner Todd Wagner rapidly converted to cash and moved on with their lives before the dot-com meltdown of 2000. Broadcast.com was an Internet start-up that intended to bring television and movies to the Net, laudable goals that we now know are only becoming technically feasible in 2008 and were hopelessly infeasible in 1999 if you recall the infamous Victoria's Secret streamed lingerie show of that year that brought the Internet to its knees.

Yahoo, which probably shouldn't have bought the company at all, overpaid for Broadcast.com in such an epic manner that the deal quickly became a Silicon Valley joke.

Nerds are sensitive and Yahoo, stung by the deal, resolved never to make such a mistake again, and they haven't. But this determination has come at a cost. Where Yahoo used to shoot from the hip, post-Broadcast.com the company became a model of hard-nosed business analysis, which also meant they couldn't make up their minds. Business development decisions at Yahoo can take months or years and every deal is required to be the antithesis of Broadcast.com. Companies used to want to be bought by Yahoo, but now they don't. Whenever fast action was required it didn't happen and the company fell further and further behind, not because it wasn't smart, but because it wasn't brave.

Like the Cowardly Lion, Yahoo needs to learn to be brave. $5.7 billion -- especially $5.7 billion in stock circa 1999 -- wasn't really a terrible loss for a company like Yahoo. Koogle paid for that mistake with his job but Yahoo has been paying in a different way ever since -- a way imposed by Jerry Yang, who clearly isn't in a position now to lead the company out of a culture that HE created.

The only way for Yahoo to succeed on its own is by becoming wild and crazy again, which Yang isn't and never will be. Ironically, what the company needs now is another Mark Cuban.

Microsoft, on the other hand, is plenty smart and plenty brave but clearly lacks a heart. More than a decade of antitrust litigation showed the company to be cynical and cruel, capable of going to almost any lengths to destroy competitors. While it can be argued that Microsoft's killer instincts are probably responsible for the company's amazing success, it has also held back the company's stock in recent years and probably won't serve the company as well in this century as it did in the last, a fact that has begun to dawn on Gates and Ballmer.

The problem is how to change. Bad habits run deep and bad reputations deeper still. The decision just last week to continue federal court oversight of Microsoft's internal operations for another two years is an indication that even with the retirement of founder Gates from day-to-day responsibilities, dirty tricks are still being played in Redmond.

I hope that Harry Saal, who has been overseeing Microsoft for the court, is planning to write a book about his experiences when he is finally finished.

The only thing that will truly change Microsoft, insiders have long felt, is a huge injection of foreign DNA in the form of a large acquisition. Yahoo is big enough, the company feels, that maybe with the right PR spin Microsoft will start to be seen as a YaSoft or a MicroHoo, the feds will go away and the stock will start to soar again. That's the hope.

Yes, Google is the enemy and acquiring Yahoo will buy market share. Yes, Yahoo has more style than Microsoft ever could. But the assimilation of 14,000 bodies and attempting to don a new style aesthetic will take time and will probably hurt the merged company more than they will help for the first year or two, so the real winner here is probably Google, which Microsoft investors have been starting to realize.

The key to this deal for Microsoft is Yahoo's strong identity and large size. That the deal is expensive is good, too, as I will shortly explain.

The line I keep reading in the press is that Microsoft is buying market share and exciting new technologies with Yahoo. But if you look at the search market it becomes clear that Microsoft could achieve the same market share for less money by buying not Yahoo, but EVERY OTHER YAHOO OR GOOGLE COMPETITOR. Half a dozen little companies would be easier to swallow than one big one, and each of those companies would come with its own secret projects, giving Microsoft actually a higher probability of coming up with a Google-killer.

BUT KILLING GOOGLE ISN'T THE POINT FOR MICROSOFT.

What we have here at Microsoft is a generational transition like we've seen in many other industries as leading companies go from robber barons to industry stalwarts. Look at railroads and oil in U.S. business history and you'll see the same thing. And just as in those industries, Gates and Ballmer know that Microsoft's style has to change with the times, but even more importantly to them Microsoft has to change because they simply lack confidence that any successor can do as well at playing hardball as Gates and Ballmer did.

Think of it like the generational change in command of an organized crime family. Tony Soprano wants the best both for his gang and for his son A.J., but does Tony really think he can count on Anthony Jr.'s ability to put a cap in some future rival? Not likely. So Tony will push A.J toward investment banking and away from loan-sharking.

Same for Microsoft, which with its Yahoo acquisition will quite consciously try to convert itself into the next General Electric, a company that uses its sheer economic power to make most of its money. All those golf games with Jack Welch were for a purpose. That's why Microsoft is assuming debt to buy Yahoo. It is a logical thing to do and will be accepted by Wall Street much more easily than if Ballmer explained that Microsoft was restructuring and acquiring debt to make it possible for the company to not just pay $44.6 billion for Yahoo, but probably another $100 billion for the other acquisitions that will shortly happen to position Microsoft in the GE space, where it will be protected from bad guesses on technology shifts.

Bill Gates is no fool. His company's pirate days are waning and a bold move is required to prove that to the world. Yahoo has no choice at all and can do little but quibble over price. Notice, too, that an all-cash deal gives Yang and Filo no stake in the combined company. They are gone.

Yahoo will give in, the Bush Administration will rubber-stamp this pact in record time, and these dysfunctional corporate characters will be off, together, down that yellow brick road.

Comments from the Tribe

Status: [CLOSED] read all comments (79)

I have read tons of articles regarding this groundbreaking merger, but none have been as interesting as this post. It provides an interesting spin on the topic - the fact that the true winner may in fact by Google - a prospect that most people have overlooked. Yet, on the other hand, if Microsoft is able to pull this all off successfully we may actually see a rival to Google step up to the plate.

Mike Mothner | Feb 14, 2008 | 3:17PM

Though I don't doubt Microsoft would like to be in the same position as GE, I don't see how they can pull that off with what they're doing.

With Vista faltering, Microsoft's core business (the desktop) is facing a bigger challenge to its hegemony than it has in a very long time. Maybe ever. (Ubuntu is looking tastier every day, especially now that it can run Photoshop CS2.)

And yet they choose this moment to go after Google? Am I wrong, or is software still an industry where a few geeks in a rented office with a really good idea can obsolete your entire empire?

All of Microsoft's power comes from it's near-monopoly on the desktop and the office suite leveraged off of that, not from MSN or the other free side-projects they kick around. If they're going to survive in any form they should be using their influence and money to mend the blight on their reputation caused by Vista, not tilting at the Google windmill.

Clancy | Feb 15, 2008 | 4:24AM

While I agree with the last comment that Vista is faltering, the posters comment that "Ubuntu is looking better and better" is a joke. The linux desktop is still miles away from the kind of usability that the average consumer demands. I know ... I'm a linux convert, trying to make it work. Thus far, the only way I actually CAN make is work is to run a virtualization product to launch windows for the specific things.

pvl | Feb 18, 2008 | 8:54AM