Jason Calacanis penned an elegant and well reasoned blog post today implying that Yahoo has committed suicide by entering into a 10-year search deal with Microsoft. I would like to make a few points explaining why I respectfully disagree with Jason.
I believe that board rooms all over America were heavily distracted by Google’s rise. Envious of Google’s success, many companies wanted to remodel themselves as a Google look-alike. This affliction was most prominent with the Internet’s four leading non-Google players: Ebay, Yahoo, Amazon, and Microsoft. For the past 5-10 years, these companies have been distracted from their core mission and focus in life, and more importantly from areas and markets where they actually had a competitive advantage, to try and follow Google (using Google’s playbook).
Laying chase to a company in an increasing returns market (the ad network creates this), is a tough and difficult game. Moreover, you are adopting an offensive game plan that is basically a carbon copy of Google’s, yet you are starting from way behind. How could that possibly work? Lastly, it is not at all clear that “if” the market fragments, that the equity value of the pieces, equals the current equity value of Google. In other words, bringing competition to the market may actually whittle down the size of the aggregate prize.
Of these four companies, I believe it was Amazon who first realized that playing Google’s game to beat Google was clearly a distraction (remember A9?). Amazon went back to focusing on their core business and even launched a new business (AWS) where they were in the driver’s seat in terms of controlling the offensive game plan. Both of these actions resulted in huge equity value creation.
For all their efforts, its unclear to me that Yahoo or Microsoft have created any positive equity value whatsoever based on their obsession with Google. I do not have access to the specific numbers, but from a cash flow perspective it would be easy to imagine that its a net negative for both of them.
Now one could ask the question, “does Yahoo have a competitive advantage in a market outside of search from which they can build billions and billions of market capitalization?” You have to look at this question on a relative scale. I certainly believe that they have a better chance building around their core strengths (Finance, News, Sports, etc) than they do trying to mimic Google.