overstanding microsoft's undying want for yahoo.
following a post-offer lull, we've seen a flurry of action in the form of reported talks and alleged partnerships. a concise summary of the parties involved and their current interests is compiled at todd bishop's blog.
understanding the situation: knowing the background, let's start with the first derivative question = "why would microsoft want to acquire yahoo" - the answers here are pretty clear: (a) to compete with google for online search; m/y would have 27% online search share vs. g's 65%, (b) to fend off google's encroachment on microsft's homecourt - office apps .
overstanding the situation: the second derivative question is "why would microsft need to acquire yahoo?" - in short, microsoft's need is a product of a void of innovation in online search and advertising. i discuss this in detail below.
-------------------------------------------------
google's rise:
we know that google was far from the first to online search and advertising, but through innovation improved on traditional index-based search with the advent of PageRank and provided a superior online advertising system in AdWords.
there are few competitive industries immune from the rise of an innovator (see toyota in the automobile world, apple in music sales, in 'n out in hamburgers, the list goes one). sustainable, competitive advantage in an open market (emphasis being of utmost importance) can only come from consistent innovation.
microsoft's shortcut:
rather than build, retain and monetize traffic through innovation, microsoft is attempting to skip those steps by acquiring yahoo. it assumes that a combined entity can accomplish what one of them could not. as a director of and investor in hakia.com, i know first hand that there is opportunity to innovate in both search and advertising, and there is market interest in that innovation.
microsoft alone, microsoft with yahoo, microsoft with yahoo and news corp - whatever combination might come will only be successful if approached through a focus on innovation.
