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Understanding Microsoft’s Drive in Buying Yahoo!

MSFT responds, but the question is: who’s in control of the ball now? I’d say still MSFT.

Logic flows so easily:

- Online advertising in the US alone stood at $25.3B in 2007, with Q4 generating $7.3B

- Quoting Yahoo! CEO Jerry Yang, online advertising in the world is a $40B business, growing to $75B within 2 years, in 2010. Connecting these dots, the US garners $25.3B / $40B = 63.25% of that today, but should shrink over time.

- Today, if MSFT/YHOO merged, they would command according to IDC.

“If a merger between Microsoft’s new media business and Yahoo! would come to pass, the combined entity would have a net U.S. advertising market share of about 17% based on our 4Q07 data,” says Karsten Weide, program director for IDC’s Digital Marketplace: Media and Entertainment service. “It would not quite bring Microsoft-Yahoo! to where Google is in online advertising in the U. S., but it would give them a much better fighting chance than if they went it alone.”

- Using that very basic argument, if online advertising will become a $80B by 2010, and MSFT/YHOO had a modest 15% of the combined pie, MSFT’s annual revenues from online advertising in the world would be $12B.

Today, MSFT makes a pittance off its MSN.com/Live.com unit. But by comparison, other units make much more:

  • Windows desktop client $13 Billion
  • Windows Server and development tools $11.5 Billion
  • Office - Information Worker - $11.8 Billion
  • Home Entertainment Xbox, Zune - $4.3 Billion
  • MSN Live Search - $2.3 Billion
  • Business Solutions (CRM, ERP) - $900M
  • Mobile Embedded Devices (phones) - $400M

Admittedly, these are 2006 figures. 2007 revenue was $51B and 2008 is forecast to come in at $60B. But the point, when you get that big, you need home runs and grand slams, let alone doubles and triples, to keep investors happy.

From 2000 to 2006, MSFT’s share price was in the toilet (hey, just being honest). Bill Gates and Steve Ballmer maintained stuck to their game plan and did not really care about the short term mindset of investors. Eventually, the stock price nudged up from $20 to the high 30’s. Sure, it’s not a Google-esque ascent, but with 9.3B shares outstanding (compared to YHOO’s 1.3B and GOOG’s 312M), it adds plenty of value to the market cap.

The point is, today Microsoft responded to Yahoo!’s “thanks but no thanks” with a “oh really”. Make no mistake about it: MSFT’s go-at-it-alone strategy online are over. aQuantive was the appetizer, Yahoo! is the main meal… once that is down, they’ll wash it down with a tall glass of AOL.

Disclosure: long YHOO

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Posted By: Ashkan Karbasfrooshan | Feb 11th

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