Another Look at Microsoft/Yahoo: With Iraq as the Example, Is the Google War Smart?

If, before we went to war in Iraq, we listed the resources it would cost against a list of things the U.S. needed to do in the economic, infrastructure, health, safety and world influence arenas, I doubt any sane decision maker would have made “war” the top choice.

Yet it was the easiest. It was simple and few looked at the opportunity cost (and almost everyone who did underestimated it).

At the heart of Microsoft's attempt to acquire Yahoo is the premise that it needs to do this to compete with Google. If Microsoft were to list the cost of the war against Google, including the acquisition of Yahoo, against its problems, I doubt it would acquire Yahoo.

It’s not evaluating the "opportunity cost," or the cost of not being able to do something else, and I’ll bet none of you do this very often either (I include myself), so feeling smug isn’t an option here.

I’m aware that using Iraq as an example of anything is risky because it is a real war with real lives lost. But, it is also the best, and most topical, example of a decision where opportunity cost was not really discussed at the front end — and it’s also the most powerful recent example of why it should be. So, if I offend anyone by using it, let me apologize up front and say that offending anyone on Iraq is not my intent.

Incomplete Analysis Leads to Bad Decisions: Is Acquiring Yahoo a Bad Decision?

This isn’t an easy question, but sometimes goes to the tactical drivers (executives live quarter to quarter) for executive decisions, which have them jumping to a conclusion based on incomplete information. If wrong, Microsoft would be in good company; most of its erstwhile competitors have gone down a similar path. Sun went after Microsoft and lost leadership in its market. IBM went after Microsoft, and HP is very grateful. (I could point to IBM's efforts to block OOXML and why HP is benefiting, but will leave that to another day.)

Now this all may be moot because clearly Google and Microsoft are at war now, and if our measure of success is financial performance, I could argue that Google is likely winning (though not yet in any area focused on Microsoft's core strengths). And, using the Iraq example, if the U.S. after invading had suddenly said, “oops, our bad, never mind” and tried to leave, I expect the exact thing it was trying to prevent would then happen in retaliation. But, if the goal is to avoid future mistakes, maybe it would be wise to explore this “Google-Microsoft war” and ask whether it makes sense for either company under the context of the forgotten opportunity cost.

Core of Conflict

Typically, when two countries or two companies go to war, it is over resources. Germany needed living room. Japan needed manufacturing resources. Both Google and Microsoft need to grow their stock price and revenue, often pulling from the same pools.

Wars can also be defensive. Many of the recent U.S. actions seem to be more in the nature of anticipating and eliminating future problems. Because Google wasn't having much impact on Microsoft’s core business yet, it is probably this pre-emptive cause that drives the dispute between these two companies. Microsoft sees Google growing eventually into its market, much like it saw the potential risk of the PlayStation to PCs as a reason to create the Xbox, and moved aggressively to block.

The resource part of this is the visible defection of some high-profile Redmond employees to Google's camp. This gives the basis of the conflict its strong grounding as at least a perceived threat, but is the threat Microsoft’s greatest?

Microsoft’s Exposures

If I, as an observer of Microsoft, were to rank Microsoft’s exposures, I would place Google towards the bottom. Similarly, comparing invading another country (Iraq or Iran) against the other choices in front of the U.S. at the time that decision was made — for instance, correcting the U.S. oil addiction problem — the latter would seem more important and likely to result in a similar outcome with more long-term benefits (particularly given what I paid for gas this weekend).

What are the larger exposures? At the top of the list I’d place improving the relationships with customers (OEMs, IT buyers and users) as the current largest problem. Linux is largely a visible representation of market dissatisfaction with Microsoft. I’m actually not aware of any other instance where dissatisfaction with a product choice resulted in the market creating its own competing offering.

Linux is owned and controlled, though this is changing, largely by people who would typically be potential customers for a company that specializes in platforms and development tools. It is an attempt at revolt, and not just against Microsoft either, but against every other alternative (otherwise the market would move to that alternative instead as buyers, with some exceptions, typically don’t want to be builders). As Microsoft fought Linux, Linux got stronger; as it is now starting to embrace the core concepts that founded it, Linux weakens, showcasing its function as a reminder to Microsoft and others that no matter how big you are, unsatisfied customers can revolt.

Second is declining perceived desktop product quality and a company direction that customers increasingly don’t appear to like. Apple, which is a traditional competitor not just against Microsoft’s offerings but against the model that created Microsoft’s existence, is surging. It is setting an example for other OEMs, many of whom are now actively exploring similar paths. Were these vendors to move in this direction, Microsoft would face a collapse of much of its perceived value and likely be forced into the hardware market as well, much like it does in the game system business, competing with an integrated product. Zune and Xbox both demonstrate that the result would be a vastly smaller and weaker company.

Third is "cloud computing" because it is a disruptive change and likely to put the existing large vendors at higher risk; it allows smaller companies to move up very quickly into positions of dominance. Google is an example of this, but it is the market move that is the direct threat. Google is just a byproduct of that threat, as are MySpace, Facebook, Second Life and even World of Warcraft. For a tools and platforms company, the goal should be to provide the engine underneath all of these companies, not buy them.

The first and, to some degree, the second problem are forcing a response to the third problem, but that isn’t scalable and forms a distraction from fixing the first two. Using the Iraq example again, the war, by most measures, actually made what should have been higher priority problems worse, not better.

In short, rather than buying Yahoo, if Microsoft were in better shape, the right choice would be to successfully sell Yahoo on Microsoft technology and then use the result to influence other emerging companies to do the same, thus assuring Microsoft’s model and the firm’s long-term success. But, by going down the acquisition path, it can only gain influence through force (hostile merger), which will lower the resources available to make better tools and platforms and turn natural partners into natural competitors over time as they move to resist that same force.

So: Again, Is Yahoo a Bad Idea?

If Microsoft believes it can’t correct the first two problems, the acquisition path is all that is really open to it. Realistically, it will probably have to eventually take a much less influential roll and possibly abandon its platform and tools business to better focus on increasing Web and media properties. A future administration will eventually have to pick one path or the other and focus, either spinning out acquisitions like Yahoo as counter-strategic, or spinning the core business for much the same reason, to gain that necessary focus. I’d place the time frame for such a decision around the time Steve Ballmer’s successor left or retired (typically, handpicked successors try to initially hold course, with Sun as a recent successful exception to that rule). It is at least a decade in Microsoft’s future.

In short, if Yahoo is taking the focus off of correcting higher priority problems in Microsoft and will result in a crippled company, it is a bad idea. If the acquisition forms the natural transition of the firm from a model that is showing signs of failure to one that is more successful, it is a good idea. Either path is viable but I wonder if the second outcome is one that is even being considered in Redmond.

Common advice before making a big purchase is to list your priorities and see if the purchase fits within them. Do you really need a new TV more than new tires or a better funded retirement plan? What if Microsoft, rather than buying Yahoo, focused on making the company a better place to work and future products more exciting and attractive? None of us can do everything and we could all make more measured choices, including Microsoft.