Why Microsoft Wants to Buy Yahoo

Putting the assets together boosts combined search market share to 36 percent, compared to Google's 53 percent, giving Microsoft-Yahoo a fighting chance to compete in a market that will not support any other serious contenders for leadership.
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Roughly the same logic holds for other Internet applications where the three companies compete, or might like to. Microsoft is a contestant in the MP3 music player business and never has been able to challenge Apple. Maybe the Yahoo assets somehow can help Microsoft do better in the music or video download markets.

As you would expect, Microsoft argues there are significant benefits of scale in advertising platform economics, capital costs for search index build-out and in research and development that it will benefit from.

True, though part of the broader problem is the sheer range of competencies the companies require, the markets they participate in, the media types they support and the ecosystems each has to find a way to fit into. The problem is that the places Microsoft might potentially have to compete are so diverse.

There's ad placement, blogging platforms, collaboration, software development, mapping, location services, mobility, peer-to-peer distribution, photo sharing, social networking, communications, video, enterprise applications and analytics, for example.

Search is the obvious place Microsoft gains mass. One cannot yet forecast how well the Yahoo assets will help in all the other areas.

There's danger of another sort here for Microsoft as well. Never before as Microsoft made such a large organization. And there's a cultural issue as well. Though it never is easy to integrate two or more companies, there's an additional problem here. Yahoo has become a lehargic company that can't seem to innovate, and can't seem to move fast even when it knows where it wants to go.

Microsoft, on the other hand, no longer is a fast-moving company, either. In the Web services area, it has shown no ability to seize market share and momentum sufficient to wrest leadership from Apple or Google or Amazon, for example. In fact, it is precisely frustration with Microsoft's inability to seize leadership that prompts the "buy share" strategy.

Putting two slow moving or arguably ineffective companies together does not seem a recipe for reinvigorating innovation within either of the two former companies. Sure, it buys Microsoft market share in the search market. Whether Microsoft will be able to do anything with its new assets is the question.

Microsoft's desktop and office productivity software businesses remain formidable. It simply isn't clear whether those assets help Microsoft so much in the ad-driven search business.