So much of the chatter around Microsoft’s proposed acquisition of Yahoo! revolves around competition with Google in the online advertising market. While that is a huge market, one that Google now dominates, and one that Microsoft has a jones for, that’s a very narrow way to view the combination. And for Microsoft, it could be a fatal mistake to take the battle to Google on its own ground. That’s the very mistake that companies like Netscape made in competing with Microsoft.
Remember that the key advantage in Web 2.0 applications comes from data assets built via network effects (and then ultimately, the ability to monetize those data assets). Thinking that way changes the calculus of this deal. Where is the high ground for Microsoft plus Yahoo!? I don’t think it’s in the combined advertising heft, despite the fact that advertising is currently the bulk of the monetization value.
Bill Tancer has a great post about Microsoft plus Yahoo!’s combined share in applications. The thing that jumps out at me is just how dominant the combination would be in web-based email. (Caveat: Hitwise doesn’t count “in service email” on AOL and MySpace in these figures.) Add in Microsoft’s incredible dominance in corporate email with Exchange and Outlook. Now think about all the possibilities that are starting to be explored in the area of email data as a source of information about users, and a locus for building new services for those users. (Of course, you might also think about the anti-trust implications of this combination….)
Email hasn’t changed significantly in years. As I’ve written previously, there’s a huge opportunity in building a next generation address book. (Doc Searls calls this Vendor Relationship Management. I prefer the term Personal Relationship Management.) I want tools that augment my ability to remember, manage, and communicate with all the people I deal with every day, in both personal and business contexts.
If Microsoft does consummate this merger (and I understand from the scuttlebutt that Yahoo! does consider it a hostile takeover), the surest way NOT to profit from it is by focusing on the areas where Google is already the strongest. Microsoft needs to invest in the future of applications where Microsoft and Yahoo! are strongest, and where there is significant opportunity for innovation. Email and other messaging platforms meet these criteria.
I know that Yahoo! is working to understand and rethink the potential of email and messaging platforms as a social networking play. (Jerry Yang talked about this at CES.) I know there are projects in this area at Microsoft as well. The question is how seriously either company takes these initiatives, and how much they focus on figuring out what users want rather than what the company wants. (Focusing on monetization first is a mistake when you’re inventing the future. As Paul Graham says, “Make something people want.” Then figure out how to make money with it.) This is hard when you’re as big as Microsoft, and your need for revenue and profit growth forces short-term thinking.