How Yahoo! Can Get Out Of The Microsoft Bear Hug [A VC]

Let me start this post by saying that I don't think Microsoft will achieve its goal of obtaining some sort of balance and scale in the search market with an acquisition of Yahoo!  If you look at the share of search that Google has had over the past five years, it's an ever increasing line. I think that line will keep increasing, year after year, until Google has all of the search market (at least here in the US and the english speaking world). I don't think there's much that Yahoo! and/or Microsoft can do about it.

There are many reasons why I think that is going to happen. First and foremost, it's because Google does search better than any of its competitors. And we all know it. So we go to Google to search. I don't think people are going to stop going to Google to search and start using Microsoft and Yahoo! Google also does a better job of monetizing search better than Yahoo! and Microsoft so they have better results in the right rail and that is becoming increasingly more important in areas like travel and financial services where the organic results are getting spammed up.

It is possible that something really revolutionary will come along and replace search as the primary we find stuff on the Internet. It's possible that social search will be that thing. But Google is investing heavily in social search and there's a good chance that they'll get there on their own. And if they don't, I think they are more likely to identify and purchase the startup that gets to it than Microsoft or Yahoo!

There's another reason why I don't think a purchase of Yahoo! makes much sense for Microsoft. I suspect that many of Yahoo!'s best services will languish under Microsoft's ownership and that users will leave. It's happening already under Yahoo!'s ownership to services like Flickr and Delicious and MyBlogLog. It will be worse under Microsoft's ownership.

Web services don't get better under the ownership of big companies. They get worse.

Consolidation of ownership of web services is not a good thing for the Internet. If you think about the Internet, it's a huge distributed network of loosely connected services owned and operated by literally millions.

Google's open letter on the Yahoo!-Microsoft deal is what you'd expect. But at least Google gets the Internet. Here's the opening paragraph:

The openness of the Internet is what made Google -- and Yahoo! -- possible. A good idea that users find useful spreads quickly. Businesses can be created around the idea. Users benefit from constant innovation. It's what makes the Internet such an exciting place.

That's exactly right. We don't need or want consolidation of services on the Internet. And if we get it, we'll simply see the users leave to adopt more distributed services. The ones that are consolidated will die a slow death.

So here's my plan for Yahoo! to avoid the Microsoft "bear hug":

• outsource search to Google. That will provide at 25% boost to cash flow according to Citigroup analyst Mark Mahaney. I have heard that this is worth about $10/share in Yahoo!'s stock price.
• dividend out to shareholders the interests in Yahoo! Japan and Alibaba. They are worth $12/share according to this WSJ article.
• split up the remaining company into several businesses which can be independent public or private companies. I would put Yahoo! home page, search, MyYahoo, and email into one company and let that be new Yahoo! The other assets could be sold off or assembled into additional private or public companies.

Not only would this allow Yahoo! to remain independent, it would bring new focus and passion to the services under the Yahoo! umbrella. I've talked to a lot of people inside of Yahoo! who run various Yahoo! web services. They'd all love to be running them the way that the CEOs of our portfolio companies run their businesses. But they can't. They have to be part of the re-orgs that are constantly going on and they have to be attentive to the quarterly goals for revenues and earnings that the public markets expect.

So Jerry and the Board of Yahoo! should resist the bear hug and split up Yahoo! instead. It's the right thing to do for the company, it's the right thing to do for the shareholders, it's the right thing to do for the employees, its the right thing to do for the web services that Yahoo! owns, and most of all its the right thing to do for the users of those web services.