August 16, 2018

Google Objects to Microhoo: Pot Calling Kettle Black?

Last week Microsoft offered to buy Yahoo at a big premium over Yahoo’s current stock price; and Google complained vehemently that Microsoft’s purchase of Yahoo would reduce competition. There’s been tons of commentary about this. Here’s mine.

The first question to ask is why Microsoft made such a high offer for Yahoo. One possibility is that Microsoft thinks the market had drastically undervalued Yahoo, making it a good investment even at a big markup. This seems unlikely.

A more plausible theory is that Microsoft thinks Yahoo is a lot more valuable when combined with Microsoft than it would be on its own. Why might this be? There are two plausible theories.

The synergy theory says that combining Yahoo’s businesses with Microsoft’s businesses creates lots of extra value, that is that the whole is much more profitable than the parts would be separately.

The market structure theory says that Microsoft benefits from Yahoo’s presence in the market (as a counterweight to Google), that Microsoft worried that Yahoo’s market position was starting to slip, so Microsoft acted to prop up Yahoo by giving Yahoo credible access to capital and strong management. In this theory, Microsoft cares less (or not at all) about actually combining the businesses, and wants mostly to keep Google from capturing Yahoo’s market share.

My guess is that both theories have some merit – that Microsoft’s offer is both offensive (seeking synergies) and defensive (maintaining market structure).

Google objected almost immediately that a Microsoft-Yahoo merger would reduce competition to the extent that government should intervene to block the merger or restrict the conduct of the merged entity. The commentary on Google’s complaint has focused on two points. First, at least in some markets, two-way competition between Microhoo and Google might be more vigorous than the current three-way competition between a dominant Google and two rivals. Second, even assuming that the antitrust authorities ultimately reject Google’s argument and allow the merger to proceed, government scrutiny will delay the merger and distract Microsoft and Yahoo, thereby helping Google.

Complaining has downsides for Google too – a government skeptical of acquisitions by dominant high-tech companies could easily boomerang and cause Google its own antitrust headaches down the road.

So why is Google complaining, despite this risk? The most intriguing possibility is that Google is working the refs. Athletes and coaches often complain to the referee about a call, knowing that the ref won’t change the call, but hoping to generate some sympathy that will pay off next time a close call has to be made. Suppose Google complains, and the government rejects its complaint. Next time Google makes an acquisition and the government comes starts asking questions, Google can argue that if the government didn’t do anything about the Microhoo merger, then it should lay off Google too.

It’s fun to toss around these Machiavellian theories, but I doubt Google actually thought all this through before it reacted. Whatever the explanation, now that it has reacted, it’s stuck with the consequences of its reaction – just as Microsoft is stuck, for better or worse, with its offer to buy Yahoo.

Comments

  1. My question is, does anybody still use Yahoo? And if so, who the heck are these people?

  2. You want a really Machiavellian theory?

    What if this is all a bluff? What if Microsoft has no intention to buy Yahoo? This wouldn’t be so far-fetched: if a) Microsoft wants to compete sabotage Google and b) believes that Yahoo is moribund, making moves on Yahoo would be the perfect stratagem. It just might alarm Google enough to buy Yahoo an an exorbitant price (both upfront and down the road in terms of corporate integration) thus draining Google’s finances and distracting it from its mission. Such a competitive disadvantage on the part of Google would fain please many in Redmond.

  3. @Faramond
    While it might be a bluff, it would not be to trigger a Google offer for Yahoo. Such a merger would almost certainly not pass muster with the governments of the world. Indications are that Google is trying to offer benefits to any third party, if the third party counters Microsoft’s offer. There are three or four large companies who have already been mentioned as possible allies.

  4. @Barry:

    My homepage is still stuck on Yahoo. They provide quicker access to news and mail than google, and I’ve been using it for a long time now… I suppose I could change over to google, but I simply couldn’t be bothered to alter my workflow after so many years. I am fairly certain that I am not alone in this.

    Google’s search smacks Yahoo’s one stupid though. Fortunately, the search box in the top right hand corner of my browser provides quick access to google whenever I need to search for something. That said, the default search agent in the browser box isn’t Google, Yahoo! or Live; it’s Wikipedia. I find that the latter has a good digest about just about any top out there, and forms an excellent jumping-off point for deeper searches.

    Maybe Yahoo was on to something when they started human indexing of the internet back in the day.

  5. I R A Darth Aggie says:

    Wake me when Google gets convicted of being a monopoly…

  6. Doesn’t it seem simpler to assume that since Microsoft has not had success at online stuff and Yahoo has, Microsoft wants to buy some success? The problem for them I see with their doing so is that I can’t imagine Microsoft not making Yahoo do things the Microsoft way, which online means tying everything together in such a way as to make the experience of using their online stuff really annoying… so you quit using the Microsoft/Yahoo online product just like you quit using the Microsoft online product.

  7. Q:

    Is that a sort of “better is the enemy of the best” argument? I could imagine Yahoo as being about as much better online than Microsoft as one could be and still be comprehensible to the decisionmakers in Redmond. (There’s also the consideration that nothing smaller would make much difference to Microsoft’s bottom line, so unless they wanted to buy AOL/TW, Yahoo is about it.)

    Google’s reaction, however, might also be the result of having drunk their own koolade. It’s quite plausible that an internet divided between Google and Yacrosoft would be a less interesting place for all concerned, so if they believed that, Google would want to object regardless of the detailed effect on their own (commanding) position.

  8. Microsoft’s cash cows are desktop operating systems (as dominated by control of the platform API that software houses must use) and office software (as dominated by control of the undocumented file formats that people expect to be compatible with).

    Google brought the focus away from the desktop and towards the network. This is something Sun has been talking about since NeWS, but it wouldn’t fly until Google came up with their search engine as the “killer app” that the network could provide and the desktop never could. From that perspective, every Internet search engine is a direct threat to Microsoft revenue and if I remember rightly Microsoft openly stated that they would make their Internet bigger and better than anyone else and they would beat google on google’s turf. That’s what the MSN project was all about. Microsoft declared war first…

    Microsoft made their MSN search engine, and a web portal, and they started their own parallel usenet MSN newsgroups, tried to redesign the email standard to only authenticate off MSN servers, and built their own “passport” login system… the list is long, and in summary it all failed. The old “embrace, extend, extinguish” strategy just didn’t work with something as big, messy and willful as the Internet.

    Google have continued making the network the centre of attention with gmail (which many people say is the best email client bar none) and their google office suite (which hasn’t quite got traction in the business world yet). Now there’s ultra-cheap linux home PC’s designed to be oriented around google network apps (plus Open Office, firefox, etc) at a price that barely covers the hardware… only Chinese manufacturers and “Walmart-style” distribution can compete in this space — no room for Microsoft (and they know it).

    What choice does Microsoft have but to declare war?

  9. Come, now, do you really think google hasn’t thought this through? They have tons of lawyers, and the acquisition has been rumored about for a long time, so I’m sure when the time came they knew exactly what they wanted to do and why they were doing it.

  10. Arvind: It’s not a foregone conclusion. With the sum total of my corporate and other social experience, I have become quite wary of attributing concerted, purposeful, and rational action to groups of people who are each in it for motives of their own (largely making a living, sustaining the paycheck, and surviving politically in the corporate world).

  11. Is that a sort of “better is the enemy of the best” argument? I could imagine Yahoo as being about as much better online than Microsoft as one could be and still be comprehensible to the decisionmakers in Redmond.

    I have not idea what “better is the enemy of the best” means. I don’t speak consultant. I don’t see why they couldn’t comprehend what Yahoo does. Who couldn’t, really? I just can’t imagine Microsoft letting Yahoo do things in a Yahoo way or any way but a Microsoft way. Partly because I simply can’t see them doing it, period, because of feeling that not making Yahoo over would be an insult to Microsoft, but mostly because I think that’s how they think they’d make money from the deal. It’s obviously how they thought they’d make money from their own online work. And they have obviously been wrong about that.

  12. I think this is the Microsoft way of admitting MS Live Search sucks and that they need outside companies to innovate when it comes to search.. so they can buy them. I dont understand why they are in competition anyway – MS makes operating systems, Google sells ad spots and search. MS should concentrate on its core business of making OS’ (you are telling me Vista couldn’t use more work?) and buying Yahoo won’t help.

  13. Microsoft just wants Yahoo to be able to promote SilverLight as a competitor for Adobe’s Flash. There is no deeper meaning in that deal.