Fri
Feb 1
2008
Microsoft's Bid for Yahoo!: The Long View
by Tim O'Reilly| @timoreilly | comments: 13
Microsoft's bid for Yahoo! is something that has been rumored for a long time, but it's really the first of many more consolidation steps for the computer industry. Every new industry starts with a few crazy innovators, who are followed by thousands of entrepreneurs engaged in a fierce Darwinian competition. Some of those entrepreneurs build large companies, but as the new industry that has been created matured, few of them make it to the finish line.
Almost everything I posited about Web 2.0 I learned by thinking about the lessons of the PC industry that preceded it: the migration of value from one business model to another (see The Open Source Paradigm Shift), the rise of new levers of competitive advantage, and, of course, the inevitable consolidation as the business ecology matures.
Virtually every first generation Web company will eventually be in play, and most of the second generation too. One or two may become the acquiror rather than the acquiree -- but even those apparent winners may be swallowed by an even more established company. (Think of Compaq's acquisition of Digital, followed by HP's acquisition of Compaq.)
The web companies that have a chance of surviving as independent entities are those that truly understand and exploit the rules of the new platform: harnessing collective intelligence to build rich troves of data that literally get better the more people use the application, running ahead of any possible competitor simply because of the network effects that pile on to keep them improving faster than any newcomer. Some of Yahoo!s properties (e.g. Flickr) have that characteristic, but Yahoo!'s business as a whole did not. It was ultimately a halfway house on the way to Web 2.0. Its original business was based on a literal aggregation of user generated content, but it quickly became a more traditional content and services portal. Later companies like Google leapfrogged it by building services that tapped more directly into the native network effects of the Web.
The other important characteristic of the winners, of course, is that they tap into a data stream that really matters. Owning network effects around consumer photos, for instance, is much less powerful than owning network effects around paid search. So one of the key questions we have to ask ourselves going forward is this: what are the major data subsystems of the future Internet Operating System. Location, identity (and social graph), search (and not just web search but also product search, in which Amazon has a very strong position) come to mind. In a lot of ways, finding the data associated with the old vectors who, what, when, where, and how is a good place to start.
In terms of the historical analogy, it's really worthwhile to think about any industry as a series of evolutionary layers. In the computer industry, the first layer was hardware. The second layer was software. The third layer is information services and APIs (where we are now.) I can't really imagine the next layer, but when it comes, it will strike us like an avalanche, starting small but then filling our entire world, just like the previous layers did...
More thoughts as this story develops.
tags: web 2.0
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Comments: 13
"the first of many more consolidation steps for the computer industry"
Hm, isn't a market with three major players (Microsoft, Yahoo and Google) something you would call "consolidated"?
Microsoft announces new Flickr pricing :(
Say goodbye to Flickr Pro. Say hello to Flickr Home Basic, Home Premium, Business, Enterprise and Ultimate. Pricing is TBD ;)
Ullrich --
You have a fairly narrow definition of the computer industry. Some other major players you didn't mention: IBM, HP, Sun. Oracle, SAP. Nokia. Amazon. Tata, Infosys. etc.
We're a long way from fully consolidated.
Hi Tim ,
Do you think microsoft will change their strategy ? or to Topple Google only ?
I think Google with its focus on "me" as against that of MS or even Yahoo! on the "consumer" (ref Steve Ballmer's letter) will still hold sway..Its here that MS needs to spend these dollars more than that on acquisition.I agree with you Tim when you say that the companies that stay alive are the ones that literally transform capabilites of the web into services..things I can use..Plus, I think the other thing that MS is maybe doing wrong is to focus on Google..While it tries to cope up with the runnning target, Google happily connects to "me"...MS should also focus on "me" rather than competition, bottomlines, etc. etc.
Bigger picture is that there is a rumor that Newscorp wants in on the Yahoo deal. it would make sense since Facebook is putting the squeeze on MySpace and the advertising dollars are shifting from TV to online since online is accountable, this might not be a done deal yet. I think Newscorp is a better fit for yahoo since yahoo is more of an online media company than a technology play.
If it happens this would be a great opportunity for the new Microhoo! to leap-frog google and create an Information coscious Environment. The pieces are there but can they put them together?
Sidharth --
I agree completely. Just chasing Google in the ad business won't cut it. Microsoft has to think about a new value proposition for the reader. Exactly the focus of my followup blog post.
Don't say you didn't know...
I expect Google to purchase either ebay or amazon in the year to come (most likely ebay).
The reason for that is simple - google cannot allow current situation in which practically all of its eggs are in the same basket - AdWords/AdSense.
The clever guys in Google will have to backup their business with a more solid channel - ecommerce(ebay being the biggest shopping portal or amazon being the largest e-retailer).
SO.My bet is that google will be the buyer of either one of ebay or Amazon.There is a chance that Microsoft will be the buyer , but it's hard to believe that the board will approve 2'nd acquisition of above 30B dollares americanos.
It's a sad state of affairs when the folks who own 95% of the most important market on the Internet, Search, are more concerned with acquisition than innovation.
The only good news is that nobody would have guessed in 1999, that a new startup would enter the market and completely dominate it.
So let's hope there's another startup that can do the same. I've started using ManagedQ to do my searches. They're a brand new search company that actually works and is definitely worth a shake.
Hopefully, someone will end the tyranny of a consolidating oligopoly.
Good post.
Consolidation proceeds by layers. As innovation peters out in a layer, it becomes time to commoditize what that layer offered. Consolidation then follows shortly thereafter.
Yahoo is a first generation property, and lives in the lowest layer. Microsoft is in the same layer, so the transaction is obvious and expected.
What's missing is that it doesn't really advance Microsoft's cause in any meaningful way. It is a tactical acquisition that adds mass to Microsoft's existing effort without adding new leverage.
There was a much better candidate in Microsoft's own backyard that they have so far overlooked. If Google were to acquire this company it would create a true Internet giant that Microsoft would be helpless against.
More on my blog:
http://smoothspan.wordpress.com/2008/02/04/microsoft-yahoo-the-only-counter-google-combination-that-makes-sense-the-force-is-strong-in-another-one/
Best,
BW
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Ted [02.01.08 03:41 PM]
Take a huge albatross that never got the internet: MSN with their tacky self-promotion and turtle slow eye candy, coupled with a search engine that only goes to ms sites.
Couple that with a nice site that hasn't been run by businessmen.
Put them together, and, voila, you get a site with tacky self-promotion, turtle slow eye candy, and diminishing traffic.
Another AOL TimeWarner in the works.