Microsoft plus Yahoo! Strategic Assets in Email
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.
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Comments: 28
[02.02.08 09:50 PM]
Microsoft needs to go from "make something people are forced to use" to "make something people want". That will be very, very hard.
I've heard many people openly worry that their favorite Yahoo acquired services will be ruined. That may cause preemptive desertion to competitors.
[02.02.08 11:48 PM]
Tim, I think you are making a good observation. E-mail is a very important asset. It is still the most used interaction tool available right now and could easily become a social network tool that would surpass MySpace and Facebook in popularity. It would need some improvement though. But innovation through email would be a powerful step.
[02.03.08 12:08 AM]
and lets not forget that Yahoo! already expressed interest in building a social network around its inbox (codename: inbox 2.0).
[02.03.08 12:29 AM]
excellent analysis & summary tim.
and if the deal goes through, expect even more interest from Google in acquiring one of the other large stores of email data you mention: AOL.
(also of interest: both MySpace and Facebook are other large email data repositories, altho most folks overlook their growing presence in email. as crappy as the UIs are, I remember seeing a Gmail PM admitting even though they were gaining on yahoo!, microsoft, and aol, he was worried they were losing market share to myspace & facebook)
- dave mcclure
[02.03.08 01:25 AM]
An interesting prophecy doing the rounds is that 2008 is going to be the year that Web 2.0 conquers the Enterprise. While large-scale M&A has its pitfalls, this could very well be a "Marriage made in Heaven".
Microsoft will bring all their Enterprise smarts to the table and Yahoo, their Web 2.0 smarts.
Microsoft is betting big on this one.
[02.03.08 01:36 AM]
TIM, YOU NAILED IT.
Microsoft is a classic monopolist ! It is not after a trenches battle with Google. Nay nay nay ! It is after dominance in a key infrastructural segment of the USAGE PIE.
"The firm that controls email is the firm that controls the UNIVERSE! Bwah-ha-ha-ha !!" exults Darth Ballmer. He has a very good point. MS cannot make a quality argument against GMail, but the network effects of merging the two mail systems - i mean like, whoa.
Dude the product development would be so simple. Ballmer could leave Yahoo! fundamentally untouched, just work on email, and create something insanely fascinating (that i would never want to be a part of, but still).
OK antitrust warriors, O'Reilly has it figured out! PLEASE SOUND THE ALARM !!! You should try and block this if you are afraid of a re-emergence of Microsoft as the supreme arbiter of this very awful potential monopoly! ugh, the privacy implications alone are just so ugly. such a monopoly should not be allowed !!!!
Thanks Tim !
[02.03.08 02:24 AM]
Smart move, Microsoft. Brilliant analysis, Tim.
[02.03.08 03:48 AM]
Another key point to this merge IMHO is the strong local presence of Microsoft in almost any country. That's something that neither Yahoo! or Google have. Even in small countries like Greece (where I live) Microsoft has a department which counts hundreds of employees when Google's presence here is almost nonexistent. That means an established network of company relationships ready to put in use now.
[02.03.08 05:19 AM]
While the idea of extracting relationship info (and traffic that can be monetized)out of email patterns makes eminently good sense, why is it that Microsoft's technology around MOSS- and Outlook-based email analysis to discover patterns and expertise haven't taken off? Also, could the existence of millions of Yahoo! Groups play into the scenario you suggest?
[02.03.08 05:35 AM]
Don't blame the blogosphere for all the chatter revolving around search and advertising and missing the e-mail potential you point out. Look at the letter from Ballmer to Yahoo BOD:
While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers.
This is all that Ballmer touches on in that letter as the benefit of the combined combined companies plus some highlights regarding combined efforts and synergies around R&D.
Apparently this is what Ballmer believes is the primary benefit for the merger, too.
Any wonder why all the chatter is around search and ads?
J
[02.03.08 06:44 AM]
You're right - there are other opportunities as well. I think along with the IP they also gain some new "DNA"
[02.03.08 07:32 AM]
Hmm. Tim, a similar thought had crossed my mind, but in relation to Instant Messaging. Does anyone have market-share numbers for IM services? MSN and YIM seem to be too of the three dominant players.
[02.03.08 09:18 AM]
@ J
Ballmer is right to put 100% of PR attention on search/ads, where the combined company is still not dominant. He's attuned to anti-trust concerns. And if there is any potential area of divestiture, it's email/IM. So it's not likely he'll be touting these strategic benefits any time soon.
[02.03.08 09:43 AM]
Tim -
I am a confirmed skeptic about a) the value of theis deal in terms of YHOO valuation, and b)MSFT ability to integrate Yahoo and create a great online services business, given 13 years of unmitigated failure at homegrown efforts through MSN, and no experience with large scale post merger integration of a multi-product, diversified company such as Yahoo!
You would be right to consider that email could be a strategic asset for the combined entity. The problem is, no one at Microsoft has any vision around consumer, web-based email and what the business opportunity around it could be. At the moment, MS has at least 4 discrete email efforts that are totally disconnected in terms of vision and coordination: Exchange, Outlook, Hosted Exchange, and Hotmail. Besides the UC aspect of the enterprise effort, there is also very little concrete technical or user-focused innovation.
Given this track record within MS, adding 2 more email products from Yahoo! (Yahoo! Mail and Zimbra) doesn't give me comfort that MS+Yahoo will result in any grand vision around email. It's a vision and execution thing, not an opportunity thing.
This deal is about extending the ad network across a lot more inventory, and thus improving the economics of adCenter and first party apps such as Search. That's the extent of it. All the other possibilities around email, IM/RTC, and all the other properties will be an afterthought.
[02.03.08 11:58 AM]
Web-based email has very little advertising value in terms of the on-page ads. Balmer himself admitted as much recently. But Web-based email can drive a lot of search dollars, because every page includes a search box in addition to the email.
We know from user testing that many people reach for the nearest "type-in place" when they want to search (I will post an article about our most recent studies Monday morning on http://www.useit.com , but the short version is that this behavior was confirmed once again last week). When there's a seductive search box staring them in the face on their email page, many people will use that instead of going explicitly to a search engine. (Many people don't even know how to get to Google's homepage.)
So email has great value indirectly, because it will drive a lot of searches.
Also, of course, there's the potential for building value-added services that people will be willing to pay for. The problem here is if one provider has so profitable a search engine that it will copy any non-patented innovation and put it on the competing email service for free. Thus, we may only see email innovations that can be protected by an iron-proof patent.
[02.03.08 12:11 PM]
Good observation about the search box real estate, Jakob. I think you're right. But it also seems to me that there's got to be some montetizable innovation lurking in email in the same way that search advertising was hiding in plain sight all the time while everyone was pursuing ever more intrusive banner and popup ads. What really made a difference was fresh thinking about how to make the advertising work FOR the customer rather than against his or her interests. When I'm emailing someone, I may be communicating with someone I know. But I may also be responding to someone I don't. Helping people to reach people they don't know is a big part of the value proposition of companies ranging from salesforce.com to LinkedIn. There's huge opportunity to rethink the CRM market, for instance, by mining email data, and providing people with better ways to manage their connections.
[02.03.08 12:28 PM]
Jakob is right, the value isn't in contextually matching search results to email content -- it's simply the fact that a regular email user will have many more impressions to use the searchbox available from their email provider.
all about Retention, Retention, Retention.
while there may also be value in the relationship data within email, i'd still have to guess the big value is in just increasing the likelihood of the user conducting a targeted search query on the email vendor's search.
[02.03.08 12:41 PM]
"Yahoo Group" membership is the dark matter of social network data -- it captures lots of stats on non-early adopters, people who don't do Facebook, LinkedIn, or whatever.
[02.03.08 03:05 PM]
We know that Google success is largely based on collective intelligence. To dig out customer info for better customer services, as Tim pointed out, Email content is the most valuable among all user generated contents including IM messages and purchase transactions. Google is leader in this field. While I suspected MS+Yahho has long way to catch up with Google's enormous computer farms, however, Microsoft may have better position at targeting enterprises, as many of them are using MS Exchanges. While enterprises are not likely to share info with MS's bots as we do for Gmail like applications, MS may provide collective intelligence at the enterprise level.
[02.03.08 08:20 PM]
The deal is priced at 1/4 of Google's market cap. Yahoo has 1/4 of Google's ad market share. I argue that MSFT is going after that traffic, not email dominance. I do agree that we're ready for some big changes in e-mail, but not that MSFT is wagering $44B on it.
[02.03.08 08:48 PM]
mlvlvr, I agree that the deal is priced and posited on the ad revenue. But if you bought a piece of property and then found it was more valuable than you thought, wouldn't you want to take advantage of the additional value?
danny's point, though, is a good one. Precisely because of the dominance this would give Microsoft in email, they might be forced to divest some of the email assets.
[02.03.08 09:24 PM]
Great points, all of them.
The future is in cloud applications, for servers, clients and mobile devices. This is what is potentially threatening to today's MS "bread and butter". Is not search engine ads revenue. MS+Yahoo will hardly catch up with Google in searches with a wall to wall approach.
The portals may be relevant in the short term, as a way of attracting people, but what really matters is giving the largest number of people access to a platform of web_applications in the shortest time. Cloud computing will change how we do interact with our machines and MSFT wants to be the first in that market, buying Yahoo will help them to do that because unifying the MSN and yahoo users base gives an amazing barrier to entry to other competitors.
In the very long term, if you are powerful in the cloud you may attack even Google's search monopoly. But that will happen, only once you have won the market of cloud computing.
[02.03.08 10:13 PM]
Entero, +1 as they say in the Apache community. You nailed it.
[02.04.08 09:22 AM]
Microsoft is waking up to the Cloud, just as they waked up to the Internet itself. That's (to me) the real rationale behind the Yahoo acquisition. Google is in a "Netscape-like" lead in the Cloud today, visibly. With "in development" stuff that will transcend the visible tip of the iceberg (sorry about the iceberg/cloud metaphor). The key question I can see is whether a combined MSFT/YHOO will be able to surmount the momentum Google has built up in cloud computing. While it's always a horse race, here I have to put my $2 on Google: two old mindsets won't trump a single, concentrated vision that has clear focus. The race is now Google's to lose.
[02.04.08 12:03 PM]
Tim, who is Entero?
[02.04.08 03:20 PM]
I hear you on the need for "Personal Relationship Management." I use several email clients with address books in addition LinkedIn, FaceBook, etc, and still the best way to remember how and where I met someone is to make some kind of note in whatever contact management tool my email tools use. And even then I get it wrong sometimes. Just last week I tried asking Dirk about Eazel and he's never, ever worked there!
[02.04.08 04:51 PM]
My two cents is that if Yahoo! is swallowed up by Micro$oft then Google will do the same to Adobe.
The Yahoo! deal has a lot of strategic linkups - e-mail, IM, online search - but a Google+Adobe matchup is very complementary: move to online software, video technologies, data engineering focus, etc.
Google relies quite heavily on Adobe products in some areas e.g. flash on youtube, pdf and flash on analytics, etc. and increasingly will want to influence the direction these technologies take.
Also, Adobe and Google really could create an OS with some great applications that could challenge the Micro$oft monopoly.
Once the first domino falls...
[02.05.08 08:19 AM]
In my experience, mining data assets is a very tricky proposition, and cos. like MSFT have been wary of doing it. It's certainly true that cloud computing offers massive opportunities for captive data monetization, hence efforts like GDrive, MS's Sdrive idea, etc. It's also very hard to switch out of apps once your data is stuck on your provider's servers. Just consider how poor the data extraction options are for rich CRM data stuck in Salesforce.com. It's a major strategic asset that locks in users and therefore could, theoretically, be monetized.
For example, MS could mine and monetize user data from MS Money, which captures user's actual spending patterns, savings, payments, loans etc. This could be extremely valuable data, and more lucrative than the subscription/license based business model of MS Money today. There are other data-rich applications that could be monetized in this way. Email is just one of them.
However, the privacy concerns prevent companies like MS from monetizing this type of user data effectively. At some point in the future, Google might extend the ad serving model of GMail and mine and monetize captive user data in all kinds of ways. That, of course, might be just a little evil. Even MS wouldn't do it.
Jakob - good point about the search real estate in email. Let's hope the MSFT guys get that and extend it to Yahoo!
