All great strategy is a combination of the obvious and the subtle; of offensive boldness and defensive genius. Steve Ballmer is making just such a move with his $44.6 billion tender for Yahoo! This investment is not just about search and Google, it is about dominance of the entire digital lifestyle. What many pundits miss is that communication - email, instant messaging, and to a growing extent the mobile phone, are as important as search. Email, after all, was the original killer app that launched the internet. By combining Microsoft with Yahoo! they grow their email base (Yahoo! is the most popular web based email site, and combined with Microsoft's Hotmail, they will be even bigger.) They also get Yahoo!'s instant messenger - which is much more popular than Microsoft's messaging client. Google is weak in both email and instant messaging. Portals are vital as well, with Yahoo! being the leading portal, with MSN in third after AOL. (I am in debt to http://pietersz.co.uk/ for a great analysis of the merger.) A combination will yield a portal well larger than any other.
That's the offensive part - now to the defense. Of course, it is a protective move against Google in search. In addition, last September Yahoo! bought Zimbra (www.zimbra.com), a company with an excellent enterprise email package that could give Microsoft's Outlook/Exchange combination a run for its money. Moreover, Zimbra is more open and integrates well with other web applications from Flickr to Yahoo! Maps. We know from the long history of commerce that open systems innovate and evolve faster than closed ones - and Zimbra was a potential threat Microsoft's dominance in corporate email. By buying Yahoo!, Microsoft will blunt this dangerous upstart - and I imagine begin to hamper its openness if not shut it down completely.
Another open versus closed area is the handset/phone. As I wrote about earlier, Google is leading the open handset alliance. (See my previous blog to understand more about the importance of the open cell phone.) Both Microsoft and Yahoo! have significant market share of mobile devices, and are not part of this open consortium. So the acquisition - if it goes through - will make it easier for Microsoft to assert strategic control in the next growth market -- mobile.
Will slamming together 18,000 Yahooligans and 80,000 Microsoft employees be difficult? - Sure. Will the integration of the technology platforms be a nightmare - Of course! Is there risk? Absolutely! But, remember this is a company that was willing to spend over $7 billion dollars on XBox before they turned a profit in the game industry - because they saw it in their strategic interest.
The questions to ask yourself are:
- Do we really understand where value is migrating in the near and distant future in our market the way Microsoft does in theirs? (See also Andrian Slywotsky's brilliant book on Value Migration.)
- Are we fighting tomorrow's battle or yesterday's?
- Do we have the courage to make the big bets necessary to win?
(This post is also at conversationstarter.hbsp.org)