Interview on SBS TV World News tonight: What the Microsoft Yahoo! bid really means


I have just been interviewed by SBS TV about Microsoft’s bid for Yahoo! The interview will appear on their World News program tonight as part of their coverage of the story.

I’m not sure what parts of the interview they’ll use, but some of the points I raised were:

* This is a massive deal. It would be the second largest media merger in history, after the $106 billion AOL – Time Warner merger in 2000. The next biggest after that, as shown in our analysis of the largest media transactions over the last 15 years, is Viacom’s $38 billion acquisition of CBS (with the two companies splitting again in 2005).

* There are three possibilities of what will happen from here. The first and most likely is that the bid succeeds. When Yahoo! turned down overtures from Microsoft around a year ago, it was a reasonable stance to say they could do better alone than owned by Microsoft. The last year, and in particular the last six months, have created an entirely different picture. Yahoo!’s stock has declined 44% since its highs last October, its profits have fallen, and the company doesn’t appear to have a clear, differentiated strategy. In contrast, Google’s fourth-quarter results showed revenues up over 50% year-on-year. Given the 62% premium that Microsoft is offering, constrasted with a falling stock price, it would be very difficult for the board to justify turning the offer down.

* The second possibility is that another bidder emerges. The most likely contender is a private equity conglomerate. Henry Blodget speculates on who might bid. While unlikely, it is possible, given Yahoo! has good cashflow to service debt, it is in a growth industry, and some of its online sites (e.g. Flickr, Zimbra) could attract good prices as stand-alone operations. Google won’t be interested, and it is very hard to imagine that any media company would have the appetite to outbid Microsoft.

* The third (and pretty unlikely) scenario is that Yahoo! does some kind of deal with Google, for example outsourcing its search to Google.

* The proposed deal is pivotal in the convergence of the technology and media industries (whether it goes ahead or not). There is no question that media distribution is becoming digital at a rapid pace. Before long a significant proportion of TV and radio will broadcast over IP, and e-paper will gradually transform the current print media. Global advertising revenue will be $477 billion this year, according to Zenith Optimedia. In his offer letter to Yahoo! Steve Ballmer said that online advertising revenue this year will be $40 billion, and $80 billion next year. If we look at digital media as a whole, these numbers are conservative, and represent an extremely attractive market. What it turns out is that ‘technology’ companies such as Google, Yahoo!, and Microsoft are looking well positioned to take a large share of this market, with traditional media companies struggling to shift their operations into this emergent space. As such, Microsoft may soon consider the likes of News Corporation as some of its major competitors. Google already sells TV, radio, and print ads in addition to dominating online advertising. Microsoft’s $6 billion acquisition of aQuantive last year and Ballmer’s statement that he expected a quarter of Microsoft’s revenue to be from advertising were just preludes to this bid to transform Microsoft. The boundary between technology and media has now blurred beyond recognition.

* This move could well accelerate the shift to online applications. Last year firmly established online applications, with not just Google, Yahoo! and Microsoft offering online software suites, but also Adobe and a host of other innovative young companies. Microsoft is rightly concerned about being left behind in the shift away from PC-based applications, with Google Apps the competitor they are most concerned about. If the acquisition proceeds and Microsoft successfully brings together the online application offerings across the two companies into a powerful suite, it will rapidly push forward both competition and user acceptance of online apps, moving consumers away from PC-based software to computing in the cloud of the Internet. The trend is in any case swift, but could be accelerated further.

There’s of course plenty more to say, but that’s a few initial thoughts. It promises to be an interesting time in the months ahead in both the online and media worlds!