At the time I wrote yesterday’s entry, I hadn’t yet seen the letter from Steve Ballmer to Jerry Yang about the reasons for calling off the deal. It does provide some more detail about exactly what Yahoo! was doing that was preventing the merger from going forward:

Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number
of reasons[.]

In essence, it was Yahoo!’s pursuit of the search relationship with Google over the last several weeks that put a real spanner in the works. To Microsoft, the whole point of the deal was putting up a stronger competitor to Google in the search marketplace, so cozying up to Google was the last thing Yahoo! should have been doing. So it appears that Yang’s decision to go down this route actually served two purposes - it put Microsoft off, but it also provided a way to improve the financials in Yahoo!’s search business, at least in the short term.

Of course, if you’re a Yahoo! shareholder, you would probably say that you’d have taken Microsoft’s 70% premium over any short-term boost in results and the mere possibility of an improvement in the share price over the medium to long term. Even though Microsoft won’t now pursue a proxy fight to replace the board, shareholders may decide that they want someone running the company who will put their interests first. Employees, on the other hand, and customers, will probably breathe a huge sigh of relief. But Yahoo! still has a long way to go to reassure either set of people.

Apparently, Microsoft is giving up in its pursuit of Yahoo!. (that exclamation mark always makes for some awkward punctuation). Officially, the reason is that:

After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal

This is a little odd, because Microsoft had made no secret of its plans to take the bid hostile if it were rejected, and had gone so far as to select board members for a proxy fight. Backing out now because of what Yahoo! was “demanding” therefore seems a bit suspect. It appears much more likely that Microsoft finally joined the board of Yahoo! and most of the rest of the opinionated world in recognizing that the deal was a bad idea. But it’s taken a surprising amount of humility from Steve Ballmer (not normally the most humble of people) to back out at this point, even if Microsoft is wrapping that humility in another explanation.

There has been speculation about what Microsoft might do if its bid fell through for whatever reason, with one of the most interesting alternatives being that Microsoft would go out and buy a slew of companies with the money it would have spent on Yahoo! I’m not sure it makes sense to spend a ton of money just because it had planned to, but it’s certainly possible that Microsoft could use some of its substantial war-chest to make some more purchases.

However, what Microsoft really needs at this point more than anything else (even and perhaps especially as it acquires more companies) is a change in culture, to move more quickly to embrace new business models, and to begin to make the shift from the offline to the online world in its software business. It needs to learn a few tricks from Yahoo!, Google and others in these areas. Otherwise, the risk is that it continues to fall short in everything it does, doing just enough to be a participant in markets without ever leading them. It’s doubtful that this change will happen anytime soon, but perhaps the Yahoo! failure might turn out to be a cause for re-evaluation at Microsoft.

I am constantly astonished by the fact that many websites still use Mapquest on their “directions” pages. It makes me wonder why they do so, when surely no-one really uses Mapquest anymore when there are alternatives like Google Maps and Yahoo Maps around. For several years now, those two alternatives have been considerably better options, with a much more usable interface (both on PCs and on mobile devices) and much higher quality maps (Mapquest’s were until very recently still those funny line drawings where roads are shown as single lines instead of two dimensional objects although this appears to have changed in the last couple of months).

And yet, according to Hitwise, Mapquest still has an over 50% share of the online mapping market. Google Maps, while coming up quickly, is still around 20%. Yahoo Maps, which had been in second place, has recently dropped to third, losing subscribers to Google along with Mapquest itself. Microsoft’s Live Maps product, meanwhile, is hovering around 3% of the market.

I found this astonishing, because I’m not sure I’ve ever used Mapquest, and I certainly never have in the last 5 years. For a time, Google Maps and Yahoo Maps were playing leapfrog in courting my attention by launching new features alternately. But Mapquest was never a serious contender. So why is Mapquest still such a major player?

I think the answer lies in the fact that many people on the Internet are inherently inert when it comes to choosing service providers. Their inertia ties them to the first service they used that worked in a particular space - be it mapping, search or photo sharing. They don’t actively seek out alternatives and so never realize that there are better services available. In the case of Mapquest, it was so dominant in the early days that its name transcended its brand and became generic in the manner of Kleenex, Hoover or Ziploc (”shall I give you directions?” - “no - I’ll just Mapquest it”).

I think this same inertia is what has allowed AOL (coincidentally, the owner of Mapquest) to continue to exist as a walled garden provider even when the same content and services that you can pay $10 to $26 a month for is now available for free at aol.com. The same group of subscribers probably make up much of the customer base for both Mapquest and the old AOL service. And this group of relatively inert Internet users is large and probably growing as more seniors and others who are less adventurous on the net come online.

This all gives a massive advantage to the first company that makes a significant new service work well enough for these relatively conservative users of the Internet. Google is able to overcome this advantage in the case of mapping and other areas such as email because it already has a strong entrenched position in search and is good at leveraging its strength across its properties through those links at the top left of each of its pages.

This is in contrast to Yahoo!, whose website is so cluttered that finding new services is very much more difficult. There are lessons to be learned both from Mapquest and from Google here. From Mapquest we can learn that being the first good provider of an online service is a massive advantage. But from Google we can learn that it is possible to overcome that advantage by leveraging mind share in an existing market into an adjacent one. And we can also learn that the time to market for competing services is very much shorter today than it was when Mapquest first launched, so that the first mover advantage is being eroded over time.

Service providers on the Internet have essentially two choices: they can target this large group of inert users, which takes a long time to jump on a bandwagon but will then ride it for many years, or to target the equally large group of more technically savvy users who are more adventurous and therefore faster to adopt a new service but also faster to jump ship when something better comes along. A third option, the holy grail, is to produce a service which serves both markets and can therefore grow quickly but also retain a large base over time. But that’s a rare service indeed.

Following on from my post about Wordpress being down a few days ago, Pingdom has put out some statistics on downtime for various social networks in 2008 so far:

Bebo	www.bebo.com	12h 28m
Windows Live Spaces	spaces.live.com	7h 25m
Friendster	www.friendster.com	6h 0m
hi5	www.hi5.com	5h 5m
Reunion.com	www.reunion.com	2h 55m
LinkedIn	www.linkedin.com	4h 0m
Classmates.com	www.classmates.com	2h 5m
Facebook	www.facebook.com	1h 35m
Orkut	www.orkut.com	1h 10m
Last.fm	www.last.fm	1h 10m
Xanga	www.xanga.com	45m
MySpace	www.myspace.com	25m
LiveJournal	www.livejournal.com	10m
Yahoo! 360	360.yahoo.com	5m

Interesting that Yahoo! 360 does best, while Windows Live Spaces is second worst - which would be more likely to follow the other should the merger go through? Given that Microsoft’s propensity for “downtime” extends into the offline world with the frequent crashes of its desktop operating systems and software, that seems a hard trend to buck, but who knows?

Blanket coverage everywhere this week of the Yahoo! Microsoft saga, and specifically on Yahoo!’s rejection of the offer this morning. Lots of coverage too of Yahoo!’s perceived alternatives, which include outsourcing search to Google, merging with AOL or News Corp, or being bought out by private equity funds.

At this point it’s beginning to look like Yahoo! is adopting an “anyone but Microsoft” strategy, in much the way some voters were described to be keen to vote for “anyone but Bush” in the 2004 elections. But the problem with that strategy, in politics as well as business, is that there’s no guarantee the alternatives are any better. The kind of blindness that comes from making negative decisions - not to do something rather than to do something - can lead to worse decisions than the very thing they’re trying to avoid.

No-one in their right mind believes merging with AOL is the answer (AOL Time Warner is of course itself the ultimate example of why such mega-mergers are a terrible idea), and no-one really believes News Corp is interested. Outsourcing search to Google would only provide a temporary benefit in terms of revenues but wouldn’t solve any of the long-term structural issues at Yahoo!. Perhaps the perception of giving Microsoft one in the eye is the biggest attraction to that strategy, but of course that goes back to my original premise.

The fact is, we all know Microsoft taking over Yahoo! will be a disaster in many ways - especially for employees of the acquired company. But it’s not at all clear that any of the alternatives are any better, and certainly many shareholders reasonably believe that this is their best hope of getting out of the current mess at Yahoo! with a reasonable price for their shares.

Yang & Co. have demonstrated that they’re not able to turn the business around, treading too gingerly at a time when the company needs some major changes. There is - I think - a close parallel here with Gary Forsee’s last few months at Sprint: the man who had been behind much of its success in previous years was unable to remove himself far enough from the strategy of yesterday to make the right moves for today and tomorrow. Yang is arguably too similar to Semel in this way, and of course has an even longer history with the company than Semel did. Yahoo! needs a Dan Hesse type who’s far enough removed from Yahoo!’s recent history to be able to make the tough choices and really make a difference. But all this is likely too late at this point. Microsoft’s latest salvo suggests it’s not going to back down and offer the higher price Yahoo! is suggesting it should, but leaves the door open with the following sentence, which may of course merely be threatening a more hostile approach over the heads of the board and directly to shareholders:

Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal. 

Ultimately, though, Yahoo! is fighting a losing battle in seeking alternatives where none really exist. The last hope is for Yang to make a convincing plea to shareholders, detailing his plan for turning the business around and providing clear milestones and metrics he wants to be measured by, as a way of buying more time. But he arguably already bungled that chance in the call which took place immediately before the offer was received. Much as Yang and the rest of the Yahoos might want anyone but Microsoft, it’s hard to imagine their future resting with anyone but Microsoft at this point.

Well, after months of speculation it’s finally happened - Microsoft has made an offer for Yahoo!. From the official press release and the letter to the Yahoo! board enclosed in it, it’s clear that discussions have been going on since late 2006, but that in early 2007 the Yahoo! board shut Microsoft down since it believed it was better off going it alone with its new strategy.

In the end, of course, the company’s fortunes have worsened rather than improved, and so Microsoft is back with what can only be described as a seriously aggressive offer - both in terms of the 62% premium on Yahoo!’s share price and the tone of the letter. It lectures Yahoo!’s board on the woeful state the company is in, its dire prospects, and without naming Google explicitly, makes clear that the only way the two companies can make headway against it is by becoming a single company. The big question is whether Yang feels any differently from Semel (whose departure from the board yesterday now seems likely to have been in part a response to - or the removal of the final barrier to) this acquisition.

Perhaps this also explains Yang’s less aggressive than forecast moves on the job front this week - in anticipation of this deal (which no doubt was signalled in advance through informal channels by Microsoft), he may have decided he was better off keeping Yahoo! together until it was clear where its future lay. At a 62% premium it would be hard to argue that anything other than accepting the offer would be in the best interests of shareholders, who are unlikely to see that kind of growth in the share price anytime soon. Whether it’s in the best interests of customers, employees or the other assets the company has is another question entirely.