Microsoft Better off Hiring than Buying

Phil Greenspun has some great points about the pending Microsoft/Yahoo! merger and why the value Microsoft has ascribed to the company is more than they deserve.

Here is an excerpt:

The interesting question is why a company that claims to know how to program would pay anything for Yahoo, much less a P/E ratio of more than 60.

Google unseated Yahoo at a cost of about $20 million in financing, simply by being effective software developers and tasteful interface designers. We can infer from this offer that Microsoft expects its own programmers to be only 1/2000th as effective, dollar for dollar, as Google’s. In comparing Vista to XP and dividing by the amount of coding effort that went into Vista, it would be tough to argue with this conclusion.

[If I were a Yahoo shareholder, I would be looking at purchasing an old battleship right now, sailing it into San Francisco Bay, and lobbing some 16″ shells on the Board members’ houses in Atherton. The chance of a Yahoo shareholder ever getting more than $31/share, adjusted for inflation and risk, seems remote.]

But the truth is not really so simple. Google didn’t really unseat Yahoo!, what happened was that Wall Street and VCs believed that being a portal was more important than being a search engine.

When Google was growing in fact, there was no clear plan to generate revenue from all those searches. Eventually Google figured out how to leverage their website and the websites of others to display ads but I blame most of Yahoo’s problems on the financial community that didn’t really see where the web was going.

Remember that Yahoo was so convinced that search was not important that they they actually slowed or stopped search development and used Google’s technology for many years.

Having said all this, Yahoo! is the undeniable portal destination online and Google is the undeniable search leader. Microsoft is a leader in other spaces but they desperately need to be more important in web advertising.

I do agree there is some logic to spending more R&D dollars to compete with Google by getting more eyeballs but if I am not mistaken, that is what the company has been doing these past years with little web growth. Picking up Yahoo would be quite a shot in the arm in terms of ad network and of course page view growth.

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