Yahoo and AOL: Desperation squared

The Times is reporting that Yahoo wants to restart merger talks with AOL as a way of avoiding the clutches of Microsoft, a move that — if true — is roughly equivalent to screaming “we’re totally desperate” from the rooftops of Yahoo headquarters. In this case, of course, it’s difficult to know who is the more desperate of the two, Yahoo or AOL. Neither has what amounts to a viable strategy, and neither has managed to capitalize on any of their vaunted media assets, despite years of trying.

Obviously, Yahoo has to cozy up to just about anyone (even Disney, apparently) in order to try and get Microsoft to jack up its offer from what the Web company believes is an insulting $44-billion or so. Like my friend Paul Kedrosky, I think Yahoo is going through the corporate-takeover equivalent of Elizabeth Kubler-Ross’s classic stages of grief — anger, denial, bargaining, etc. Right now it’s stuck in bargaining.

Fiduciary duty obviously compels the Yahoo board to fight the Microbeast, but it still seems somewhat futile. I hope Jerry Yang doesn’t try to actually float the idea that a merger with AOL would be a good thing for Yahoo — the howls of laughter would drown him out. Better for Yahoo to suck on a tailpipe out in the corporate garage than succumb to that. Rafat Ali at PaidContent says it’s pretty unlikely that Time Warner would do it, and Ashkan at HipMojo doesn’t think it’s too likely either.

21 thoughts on “Yahoo and AOL: Desperation squared

  1. I think the Times post about Yahoo/AOL links nicely to your previous 'media at hyperspeed' article. It's been over two days now, and all the reasonable opinions about the Microsoft-Yahoo deal have been beaten to death. I'm looking forward to a sensational article about a Baidu.com/Yahoo merger. After all, Lenovo took over IBM's struggling PC business…

    • I think you're right. I'm expecting articles any day now about how
      Yahoo is going to merge with Cisco or Amazon — or maybe Wal-Mart.

  2. Better for Yahoo to suck on a tailpipe out in the corporate garage than succumb to that

    Jeez Matt, don't give them any ideas! From the sound of it if they have to choose MS or death, they may choose the tailpipe.

  3. Matthew, I think the possibility of an AOL/Yahoo! merger needs more analysis, less bashing. You're a smart guy, a journalist, and I'd love to hear some actual reasons for you as to why you think Yahoo!/AOL would be bad. The following are some of my own thoughts on why an AOL merger would actually help Yahoo!:

    1) Yahoo! maintains its position as the top site on the web. Quantcast shows that adding AOL’s visitors to Yahoo!’s puts Yahoo! at almost 200 million monthly uniques, almost 50% ahead of Google. ComScore data is less exact, since it groups AOL under “Time Warner Network”, but still shows the same trend:
    http://www.quantcast.com/top-sites-1
    http://www.comscore.com/press/…..press=2000

    2) Yahoo! becomes the dominant player in IM. Yahoo! Messenger is already interoperable with Windows Live Messenger; adding interoperability with AIM means that they control ~70% of desktop IM client market share(more recent numbers on this are needed, but by the end of 2006 AIM was ~50 million, and both Yahoo! and Microsoft’s were ~20 million), and their clients can talk to everyone else’s. Yahoo! and AOL have both made progress in integrating IM with E-mail, something Microsoft still hasn’t done. As Yahoo! expands its e-mail services into enterprise markets, and enterprises increase their usage of IM, this could be a big deal.

    3) Much better integration potential than with Microsoft. After being stuck in Time Warner’s in-fighting old media bureaucracy for so long, I’d imagine that AOL employees would be overjoyed to be brought into an organization that understands and is about the web. There’s also excellent potential for brand integration here:
    – Yahoo! is a brand AOL users would be comfortable with.
    – It’s a brand that it makes sense for AOL to adopt as it’s been expanding overseas operations(where Yahoo! already has a strong presence).
    – The Yahoo! brand offers a graceful way to retire a brand that the tech-savvy have long scorned.
    – Go to Yahoo.com, then go to AOL.com. The portals are almost identical. It’s feasible that a full-scale integration of the two properties could at some point take place.

    4) There are plenty of other reasons why an AOL/Yahoo! merger has potential. Concentration of content-provider partnerships, joint efforts in mobile services/advertising, online/offline music offerings, and the fact that both are much more youth-friendly brands than MSN or Google. Plus more.

    • Jay, I don't think a Yahoo-AOL merger would necessarily be bad — I
      just don't think it would be very good. And I certainly don't think
      it has as much potential as a merger with Microsoft, even though I
      don't think that would be all that great either.

      You are quite right that Yahoo would get more users, and that the two
      could merge their IM services, but I don't see how either one of those
      things would mean a big boost for Yahoo in the places where it really
      needs a boost — namely, monetizing its user base and/or competing
      effectively in search.

      AOL has no search capability of its own, having given that job to
      Google, and it hasn't shown any more ability to monetize its millions
      of users than Yahoo has. Adding more users isn't the solution.

      • More users = more money from display advertising.

        Also, the mobile services I mentioned earlier are something Yahoo! and AOL have both been working hard on, and in the early stages of an emerging market, their integration could give them a big lead on other competitors. Mobile advertising has a lot of potential, especially when you add local map-based services, yet another area where a Yahoo!/AOL merger would create a clear leader that's likely to last.

        Another method of monetizing their userbase is through entertainment services. AOL has the largest, most popular music portal online with a key partnership with XM Radio. Yahoo! has a renewed commitment to DRM-free music sales. With more promotion, and a partnership with an MP3-playing device maker(or one of the cell-phone makers they're partnering with for their mobile platforms), I bet they could outsell iTunes. They could also add streaming internet radio to their IM platforms, with tiny “Buy <song that's playing now> for 99 cents” notifications.

        Those are just a few ideas. When you have that many users, and you're the leading provider of that many services, it becomes almost impossible *not* to find ways to monetize your userbase.

        Finally, search. I'll simply repeat what Yahoo! has been saying since they announced their new strategy: Yahoo! is not a search company. It doesn't have to be. Search is only one tool web users need, not the only one, and not even the most important one. Yahoo! could take over AOL's search market share, small though it may be, enjoy the revenue it does provide, and focus on earning more revenue through display advertising on their other services, and other business models.

        • Fine, Jay — let's leave search out of it. And I will agree with you
          that Yahoo *should* be able to monetize its millions of users, and
          even that it *should* be able to combine with AOL and leverage the
          combined entity into music (or any other content for that matter) and
          compete with iTunes, etc. All of that is like me saying that I
          *should* be able to fly if I just flap my arms enough.

          The fact is that Yahoo hasn't shown that it can build or grow any of
          the kinds of businesses you're talking about, with the possible
          exception of banner advertising, which is the slowest-growing and
          lowest-margin ad business out there. That doesn't exactly fill me with
          confidence about Yahoo's prospects in the event of an AOL merger.

          • I respectfully disagree, and submit that in fact Yahoo! has a much better idea of how to monetize millions of web users than Microsoft does. Microsoft's online services aren't even making money, after all:
            http://spreadsheets.google.com/pub?key=pYFPEp3S

            And while Yahoo's profit margins may have be down from a couple of years ago, their profit itself has been going up:
            http://spreadsheets.google.com/pub?key=pYFPEp3S

            To me, that looks like Yahoo! knows what it's doing. Increased expenses are likely a result of investing in innovations that Yahoo! knows will pay off later. If Yahoo! were such a crappy business, why would Microsoft be willing to *take on debt* to acquire it? More importantly, why would they be so insistent on doing it now, rather than waiting?

            If Yahoo! truly is heading down the tubes, Microsoft could get it at an even better price, and Yahoo!'s shareholders would be even more insistent on accepting any offer. The truth is that Microsoft knows that Yahoo! is succeeding, and is taking advantage of Yahoo!'s weak position in the market(because the public is still relying on false metrics of success like search market share) to try and get Yahoo! while it's undervalued before the share price rebounds to where it should be.

    • Wow, merge to failing companies! Let AOL destroy yet another great web property… OK, so maybe Yahoo! would be able to save AOL, but I think Microsoft would be a better shot at saveing Yahoo. If any company can pull off a merger as complex as a Yahoo! Micrsoft merger, it would be MS. And they have plenty of cash to pour into doing it. In the end, what we really need is a serious competitor to Google, and I don't think AOL/Yahoo! would be a very serious competitor.

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  8. Wow, merge to failing companies! Let AOL destroy yet another great web property… OK, so maybe Yahoo! would be able to save AOL, but I think Microsoft would be a better shot at saveing Yahoo. If any company can pull off a merger as complex as a Yahoo! Micrsoft merger, it would be MS. And they have plenty of cash to pour into doing it. In the end, what we really need is a serious competitor to Google, and I don't think AOL/Yahoo! would be a very serious competitor.

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