After fumbling its opportunity to get in bed with AOL, Microsoft has one more way to gain the scale necessary to be a serious competitor to Google: Get in bed with Yahoo. (I am extremely skeptical that the MSN-is-a-Microsoft-division strategy will ever work–a skepticism developed over 11 years of watching Microsoft make vow after vow only to peak in distant third place).
To be clear: Microsoft buying Yahoo would be a disaster–for both companies. Yahoo would disappear inside the Microsoft beast, the talent would leave, the brand would get diluted, the focus would change, and the company would ultimately disintegrate. MSN’s biggest weakness has always been that it is merely a division, one designed to support the ongoing dominance of Microsoft’s crown jewels (Windows/Office). If Microsoft bought Yahoo, the latter, too, would become a subordinate division.
The smart play, described in today’s WSJ’s article, would be for Microsoft to give MSN to Yahoo! in exchange for a big equity stake in the combined company. Yahoo-MSN (which should remain “Yahoo”) would immediately have the combination of scale, media, and technology necessary to challenge the Google juggernaut, and if it was successful in doing so, Microsoft shareholders would benefit. It is less clear that this move would be a positive for Yahoo, which means that Yahoo could probably extract a good price.
Right now, given the egos involved (on display in the failed AOL negotiations), this seems a long-shot. Microsoft has never experienced or admitted defeat on this scale, and selling the division would undoubtedly (and shortsightedly) be viewed as defeat. Short of a Yahoo-MSN combo, Microsoft’s other option, in my opinion, is to spin MSN out as a public company.