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Thursday, April 10, 2008

Yahoo-AOL "Surgical Merger" Not as Crazy as It Sounds

The problem with the Techmemification of tech news is that you often get your news through the filter of arrogant blowhard bloggers who distort the reality field even more severely than news outlets themselves. Case in point, this Michael Arrington rant on the impending Yahoo business combination scenario. Everyone will read it, and now everyone will start wildly assuming the narrative has to be seen through this lens.

Personally: I don't know what News Corp. is doing or thinking. They aren't a player in search or many of the current types of Internet apps that reside within these giant companies. I don't know or believe that Yahoo is going to roll over and hand their ad management over to Google AdWords. We're getting way ahead of ourselves here. [Edit: The fact that they're going to test Google's product, at this stage, is a punch to the gut for internal morale, if you ask me. Bad strategic move. On this particular point I can't help but agree with a colleague at another SEM firm that the current set of "anything but Microsoft" moves seem knee-jerk and sophomoric.]

Fred Wilson uses his narrative powers for good, at least. The giants are playing around with beloved Internet services like they are toys. To a select few of these bigshots, they're just assets to be bought, sold, traded, combined, and such. The rest of us actually use and rely on them -- the whole reason they wound up profitable in the first place!

Wilson, bless him, actually gives a crap about what might happen to users of AIM. See? There are some real details of user habits and migration to new services that might matter in there. Such details also prove that companies like AOL do have a remaining valuable user base, one that would integrate well into Yahoo, for the right price.

Henry Blodget also points to a number of popular AOL services and brands that might find a pleasant home within Yahoo.

So it's a double shame that wannabe financiers in the blogosphere take the same "bigshot with toys" attitude as some of the bigshots themselves, towards what are actually vitally important services that many people use now, and will want to see improved down the road.

Give Yang and the Yahoos just a shred of credit. Don't you think their concern over those services and their future is even a tiny bit of a motivator in resisting the Microsoft bid?

If you work through the logic of the strengths and potential of all these companies and their users, you might be able to draw your own conclusions, far removed from the fist-pounding bully talk that has unfortunately become a favorite of, not only media company executives, but bloggers cheering them on.

Last week, right up to last night, I worked out my own analysis of the current situation, in between long bouts of actual work -- and most of it came about without the benefit of leaked info about the AOL talks. Reprinted from the Traffick Newsletter, in its entirety, is my take.

--

'SURGICAL MERGER' WITH AOL COULD HELP YAHOO THWART MICROSOFT BID

By Andrew Goodman, April 10, 2008


In the first part of this story, I attempted to establish the premise that core organic web search is fairly defective today, in spite of the many advances and the various distractions and apparent improvements provided by today’s “blended” search results.

Rich Skrenta, founder of a stealth startup called Blekko, complains that Google “was built to index a web that no longer exists... a web where people still engaged in social linking behavior, for one thing.”

Skrenta believes that the “editorial voice” of a search engine is expressed through its algorithm. As the founder of a famous “scalable” Internet directory that didn’t, in the end, scale, Rich knows his stuff cold. Whatever he’s working on is bound to be more in sync with the web than that PageRank-dominated Google model.

In a related vein, as I pointed out in Part 1, I believe that a company like Yahoo may be able to create more consumer-friendly search by working towards an embrace of open formats and “interoperability” and “participation in a trusted metadata scheme,” but will bias the voice so that a certain “trusted universe” of publishers may be featured, as it were. This is no different in principle than Google hand-picking the (fewer than 10,000) sites that are eligible to appear in Google News, you know.

Essentially, the idea I am raising here is a new, more sophisticated take on “paid inclusion,” hopefully without the paid. But a hefty once-a-year fee per domain ($500) might make sense – it would weed out the silly high-volume spam, and encourage registrants to make the most of their participation in a new ‘publisher environment.’ Break the rules, you get booted. If you’re truly serious about content, you’d no doubt pay the $500 and interact diligently with the custom environment set up by the search engine. That doesn’t mean that no other content would be indexed. You could still “blend” various kinds of results, including the backfill of full web search, paid listings, and so on.

Sure, Google Webmaster Tools are cool… to a point. Sitemaps protocol – useful, but already embraced by more spammers than legitimate publishers. But we think there is more to interoperable publisher-index life than that. And Google at 90% market share would not be healthy for anyone.

Whatever Yahoo is working on, or could work on, they need to figure out how to deal with current reality - the looming Microsoft offer. If they’re committed to the idea that they could come up with consumer-friendly, useful search that actually beats Google’s, how will they do that given that Microsoft has continued to press its near-hostile takeover bid with threats and bluster?

There are three leading scenarios:

(1) Try to go it alone, or (1+!) try to go it alone while enacting poison pill clauses designed to sour Microsoft’s takeover experience and to stick it to Steve Ballmer personally. This scenario seems unlikely or at least unhealthy. It would be a spiteful strategy that would be opposed by most shareholders, and possibly, the legal system. The prospect of a years-long struggle reminiscent of Peoplesoft’s attempt to resist Oracle is frankly nauseating. While it is that type of takeover negotiation history that emboldens Yahoo’s leadership to believe they can exact a higher price from Microsoft, too long a waiting game would sap morale internally and in the ecosystem.

(2) Find a reasonable enough business combination that can help Yahoo gain a bit of scale and market share, and distract shareholders enough to turn down the Microsoft bid in favor of moving forward with this second, less drastic, deal. This would be with an old-fashioned consumer Internet brand like AOL. There has been some chatter about this, such as here: http://blogs.zdnet.com/BTL/?p=7946. Most observers see it as a bad idea. Unless it is done very carefully, I have to reject the idea insofar as there would be far too much chaff mixed in with the wheat at AOL. Yahoo can’t afford to overvalue AOL and then go winnowing out the parts of it that might be useful to Yahoo. This would financially weaken Yahoo and make it less able to move on other priorities. However, if a smartly-constructed "surgical merger" can be put together, I think this alternative might really work. Here's one recent take on the talks taking place with AOL.


(3) That leaves the Microsoft deal. Although anathema to the unspoken “no assholes rule” in place at many companies, Yahoo included, Ballmer and crew bring a strong offer to the table. A combined company looks like a strong company, able to then accomplish further momentum-builders. That might include increasing stakes in Facebook and other emerging social apps and content verticals. It might also include waiting AOL out to buy up any useful parts piecemeal, or making another big offer and then discarding the scrap. Now, the “combined company” starts to look like it might have the muscle to be a real global player on a par with Google.

(3) is still the strongest play for Yahoo unless they and AOL get really creative, and quick. I just hope that in all the commotion, the kernel of the above idea is not lost. Yahoo, to say nothing of feisty secretive startups like Blekko, could still do some cool things to provide a better search experience for consumers, and a more consistent, respectful relationship with publishers. In spite of many great products and the many good deeds they do, in core search, Google has something of a rep now as a “glorified scraper company” with outdated ranking methods. Surely there is room for a viable second-place alternative.

I'm on the edge of my seat here. Aren't you?


Have a good one,

Andrew

P.S. Yahoo, it's a bad idea to hand over your ad management to Google.

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