Let us complete following sentences:
Microsoft is —————- company.
Yahoo is —————–company.
I asked the same question to few friends. They all said that Microsoft is a software company while Yahoo is an internet company. Do you guys also think same?
I wanted to test my hypotheses so I downloaded recent annual reports of both the companies.
Microsoft’s annual report says:
“We develop and market software, services, and solutions that we believe deliver new opportunities, greater convenience, and enhanced value to people’s lives. We do business throughout the world and have offices in more than 100 countries. We generate revenue by developing, manufacturing, licensing, and supporting a wide range of software products for many computing devices. Our software products include operating systems for servers, personal computers, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solution applications; high performance computing applications, and software development tools.”
While Yahoo’s annual report says:
“Yahoo ! Inc. together with its consolidated subsidiaries is a leading global Internet brand and one of themost trafficked Internet destinations worldwide. Yahoo ! is a focused on powering its communities ofusers, advertisers, publishers, and developers by creating indispensable experiences built on trust. We seek to provide Internet services that are essential and relevant to these communities of users, advertisers, publishers, and developers.
I went further and counted the words “software” and “internet” in the most recent annual reports of Yahoo and Microsoft.
Software: This word is found 187 times in Microsoft’s annual report while same word is found 22 times in Yahoo’s annual report.
Internet: This word is found 124 times in Yahoo’s annual report while same word is found 36 times in Microsoft’s annual report.
I personally think that DNA of both companies is very different. Microsoft is known for its’ software products while Yahoo is known for great internet products. Do these perceptions matter in the business world? I think that perceptions matter a lot for customers as these perceptions shape brands over the time and are real strength behind brand value. When companies diversify, they lose focus, they also lose their power. Just think if “Rolex” is acquired by “Verscae” then will you buy “Versace” watch?
Microsoft did not have internet strategy in 90’s. They acquired Hotmail and got into internet business. They are still spending a lot of money to acquire “Online Services Business”. This is Microsoft’s revenue for “Online Services Business” for last few years:
| (In millions, except percentages) | 2007 | 2006 | 2005 | Percent Change 2007 versus 2006 | Percent Change 2006 versus 2005 |
| Revenue | $2,474.00 | $2,299.00 | $2,344.00 | 8.00% | -2.00% |
| Operating income (loss) | $ (732) | $ (74) | $402.00 | * | * |
Microsoft is losing money on this business. They want to acquire Yahoo and be a market leader in “online services business”. I think that internet is a different beast than software business. Both have different philosophies and different focus. Different business strategies are required to tackle different businesses. One can not put legs in two boats going in different directions. Microsoft charges money on each software while internet philosophy is different. Google, the most dominant force on internet, provides so many software services to customers free of charge. Microsoft wants to win this war by acquiring Yahoo. I think that this acquisition will destroy value for both the companies. Steve Ballmer should read the case study on Ralston Purina and Eveready. Ralston bought the battery brand in 1986 from Union Carbide. Eveready was already number one, with 52 percent of the market. Slowly, Eveready started losing market share under Purina and lost its’ market leadership. Ralston spinned-off Eveready in 2000 as a separate company. Steve Ballmer is doing the same thing that was done by Ralston in 1986.
A more credible strategy for Microsoft would be to spin-off “Online Services Business” and get a different management (new CEO) to take care of the new business. Just think for a moment that you are Steve Ballmer with two major product lines (software and internet) and each of your major competitor (IBM, Apple and Google) has just one product line, then you are at a disadvantage. Your competitor’s CEO can give full attention to the problems at hand. You have only one-half of a CEO to run things.
Filed under: Internet, finance | 2 Comments
Tags: Acquisition, Microsoft, Yahoo
Hi Prasanth,
Good posts and analysis !! So are u MBA grad or some thing like a BA ? Why do you analyse and wer do u get the Fin Statement of Biggies ?? Whats the reason behind these analysis ??