People with maths background can relate to the "necessary but not sufficient condition" premise used for proving theorems and framing hypotheses. Microsoft's unsolicited $44.6Bn bid yesterday for Yahoo is a perfect case for this premise. The combination is necessary but not sufficient to unseat Google from its undisputed dominance in the online search advertising market. It definitely won't slow down Google's foray into other areas (beyond search) like cloud computing that threatens Microsoft's core desktop computing business where many have tried but failed to challenge Microsoft's monopoly .
The combination is "necessary" because Yahoo (#2, at 19% share of the search advertising market) and Microsoft (#3, 14%), together, stand the best chance to challenge Google's (#1, 56%) massive, and growing, lead in the U.S. online search advertising market. Search represents 99% of Google's total revenue of $16.6Bn in 2007. Yahoo's much hyped new search initiative (Panama) has thus far failed to halt its declining market share. It has practically lost the search battle to Google. Some have even suggested that Yahoo should outsource search across its network to Google, similar to what AOL has been doing. Microsoft, on the other hand, had not until recently realized the importance of Internet in information sharing and computing. It's a late comer in the search advertising business. This short-sightedness in an emerging space is common when your traditional business enjoys monopoly status and drives bulk of the total revenue.
Search has always been a scale business. Scale provides improved monetization as more advertisers in the network positively impact coverage, click-through rates, and pricing. Microsoft's lock on crucial access points through its Windows, Internet Explorer, Office, and Xbox platforms and Yahoo's massive global user base across its network of online properties will provide them several channels to advantageously put their search engine in front of their users. Such an advantage is required to tackle the Google juggernaut.
In other words, to have a viable alternative to Google in search advertising, a combination of Yahoo and Microsoft is "necessary."
Now, whether the Yahoo + Microsoft combination is "sufficient" to beat Google is a different question altogether. Firstly, we're talking about merging operations of two huge companies with significant overlaps in almost all global markets where they compete against each other. Consummating the merger and realizing the expected $1Bn is annual savings will be a big distraction in the short to mid-term - the duration during which Google can continually focus on improving its core search technology and widening its market lead.
I believe the biggest advantage Google has got over either Yahoo or Microsoft is its employees and its ability to continually attract and retain better talent. Google, at heart, is an engineering firm first. Product and technology folks at the company enjoy more power than folks on the business side. Yahoo has never been treated as a technology firm - it's an online media firm, competing in an emerging space where technology is the differentiator. It's still "cool" to work at Google (the coolness factor however is dwindling as Google looses its "startup charm" and grows in size - its employee base stood at 16,600 at the end of 2007, adding 6,000 during the year). Yahoo, on the other hand, is laying off employees and is suffering from a morale issue. Confidence at Microsoft 's Internet divisions has never been very encouraging, if we talk about the desire to be #1. Internet business for Microsoft's management, until recently, had been an afterthought. It is now trying to buy its way into the search advertising market through a series of recent acquisitions, leading up to the announcement of its bid for Yahoo, the biggest of them all.
Lastly, Google will still have almost double the market share in the search advertising market compared to the combined share of Yahoo and Microsoft. That's a big lead to overcome. Google has earned user's mind share, and it's unlikely many will suddenly switch their search behavior going forward unless the alternative is significantly better.
In short, a merger between Yahoo and Microsoft will not guarantee Google's displacement from the top, hence it won't be "sufficient."
Finally, a comment on the chances of the merger going through. I think initially we may see some game-playing by Yahoo to get the bid up, but ultimately Yahoo would accept the offer. It realizes that it needs serious help in overcoming the challenges it's facing, reflected by its languishing stock price and recent top management upheavals. I also doubt the U.S. Justice Department would block the deal, though the scrutiny may be closer in some of the global markets.
For the time being, let's sit back and enjoy the public drama that would be played in coming weeks as Yahoo responds to the Microsoft offer and other potential bidders emerge for one of the largest technology mergers ever.
