Microsoft Shoots for Outer MySpace

Yahoo's board would have little choice but to acquiesce, especially if the offer per share increased. Microsoft also could make strong arguments about returns on shareholder value. The current reported rumor, from The Wall Street Journal: New entity would combine MSN, MySpace and Yahoo.

Conceptually, the combination has loads of potential. Logistically, it's a nightmare integration, especially if the new entity operated as a separate company. I'll start with why the entity would make sense, and then why not.

Too much emphasis is placed on Google's search and increasing advertising dominance. Google's market share is only partially relevant to its success. For Microsoft, what matters is the competitive platform. Google has achieved what Netscape couldn't: create an alternative platform to Windows that appeals to developers and end users. Windows' broader platform is the PC, while Google's is the Web.

Google's success is rooted in its ability to make money and to provide a compelling platform where third parties also can make gobs of dough—just like DOS and Windows in the 1980s and 1990s. Right now, analysts, bloggers and the news media largely measure Google's success in search market share. But that's the wrong measure. Online success should be measured in eyeballs, meaning how long people spend at any Web property. Advertising requires real estate. The most valuable ad space is where people stay, rather than just drive by as they do with searches.

For time spent online, AOL and Yahoo are the leaders, according to Nielsen/NetRatings, measured as parent companies and brands. The online analyst firm measures time per person online in two ways—parent companies and top brands. Nielsen/NetRating's definition:

"A parent company is defined as a consolidation of multiple domains and URLs owned by a single entity. A brand is defined as a consolidation of multiple domains and URLs that has a consistent collection of branded content."

The rumored AOL-Yahoo link up would bring together the online leaders, as measured in how long people spend online. The match-up would be compelling. I won't comment on potential shareholder value, as I'm not a financial analyst. But a News Corp.-Microsoft bid for Yahoo also would be compelling for similar reasons. The charts above and below tell the story.

The problem with either parent company/brand mashup: The numbers aren't necessarily inclusive. Combined time spent online for AOL and Yahoo is more than 7 hours and more than 4 hours for Microsoft and News Corp. But there would be tremendous Web property overlap, particularly between AOL and Yahoo, that would cancel out time spent at some services. The overlap would be even greater for a combined MSN-MySpace-Yahoo.

That said, Microsoft and News Corp. would greatly extend their real estate for placing ads—and Microsoft would have its own and Yahoo's analytics and search tools to offer marketers. Microsoft could provide the real estate for advertisers and tools for measuring their campaigns, which would be compelling. The hook: How much time people actually spend at those properties. By comparison, without YouTube, Google is more a way station to search destinations.

The value of Google's broader platform doesn't diminish, simply because other properties pull in end users for longer periods of time. Google search is high on relevancy, and its analytics, keyword search and ad services deliver results. But by owning prime real estate, Microsoft could, with News Corp., work around Google's market share dominance.

The online real estate's value isn't just measured in time at a property, but how people spend it there. Microsoft and News Corp. both can rightly claim that people are either consuming high value digital content, like music or video, or engaging other people socially. MySpace is a huge draw by either measure. Both attributes, digital content and social engagement, have great marketing appeal. It's about influence—who's recommending what to whom—and increasing brand awareness and appeal.

While this online property mashup has potential, there are questions whether the architect can deliver. Except for a brief period—less than two years—Microsoft's Online Services Group has lost money. Microsoft launched MSN in 1995, and the division stayed in the red for about seven years. The Online Services division has been back in the red since the MSN-to-Windows Live rebranding about two-and-a-half years ago.

Microsoft hasn't yet shown any ability to sustain profits from online services. So, it's a wonder News Corp. would entertain any joint bid for Yahoo. It's no wonder that Yahoo's board so strongly resists Microsoft's hostile takeover. Yahoo is a commanding brand and set of Web properties as measured both in unique visitors and time spent online. All of that could disappear should Microsoft come and do to Yahoo what it has done with its own Online Services group.

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• Ballmer's Yahoo FUD Letter, Microsoft Watch, April 6, 2008
• Ballmer Boo-Hoos Yahoo, Microsoft Watch, April 6, 2008
• What 2007 Ad Spending Means to Microhoo, Microsoft Watch, March 26, 2008
• Microsoft Search Retreat Continues, Microsoft Watch, March 19, 2008
• Microsoft's Faulty Math, Microsoft Watch, Feb. 25, 2008
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