With the Microsoft-Yahoo! mega-merger now firmly in what-coulda-been territory, both companies face an uncertain future in the emerging market for cloud computing. Microsoft, infamously, has bungled its migration from traditionally delivered software to Internet-based services, while Yahoo!, amazingly, has failed at even a higher level: Though created in 1995 specifically to address the needs of a new generation of Internet-based content and services, Yahoo! has watched its one-time lead dwindle in the face of Google. What are these companies going to do to remain relevant?
Microsoft provided some hints about possible alternatives over the weekend in a public statement explaining that it was unable to come to terms with Yahoo!. In that statement, the company noted that it would seek "strategic transactions with other business partners." While there are no companies out there that can help Microsoft "scale" to meet the challenge of Google as could Yahoo!, one can't help but think that Microsoft is looking at second-tier Internet businesses like AOL, Facebook, and MySpace.
The problems for Microsoft, however, are far broader than those presented by Internet search and related businesses like online advertising. Microsoft is also failing badly in many of its other non-core markets as well, especially with consumers. Apple currently dominates the digital media space with its iPod and iTunes products, leaving Windows Media and the more recent Zune platform in the dust. And Windows Mobile, already on the verge of fading into oblivion thanks to RIM's successful Blackberry devices, succumbed quickly to Apple's iPhone, with Microsoft scrambling to figure out what happened.
In the video game market, Microsoft was able to parlay a one-year head start in the market into one of its most conspicuous defeats yet: As of the end of last year, Nintendo's blockbuster Wii console, with 19 million units sold overall, has outsold Microsoft's Xbox 360, which has sold just 16 million units despite being on the market twice as long. Meanwhile, Sony's PlayStation 3, once seen as a laggard in the market, is gaining ground with 8 million units sold in just a year: Many now expect it to outpace the Xbox 360 by the time this video game generation has concluded. When you tack on the Xbox 360's record-setting $1.1 billion reliability-oriented warranty hit from last year, you have the makings of a debacle. Yes, Xbox fans are passionate about their favorite system. But they're also poised to become a minority. Again.
Over at Yahoo!, the situation is even worse. Left at the altar by Microsoft, Yahoo!'s shares are expected to return to their pre-merger-talk doldrums in the low $20 range. (The stock was up around $28 recently thanks to Microsoft.) In pre-market trading early Monday, Yahoo! shares were down 22 percent. A number of shareholders have already launched lawsuits against the company, and we can expect to see more of that in the days ahead as Jerry Yang and the Yahoo! board are held responsible for failing to come to terms with Microsoft.
The problem for Yahoo!, of course, is that it has no future. Unlike Microsoft, which is at least diversified, Yahoo! has one business only, addressing the needs of consumers online. And those consumers, increasingly, are looking to Google and other companies while online, especially in those markets that actually earn revenues. For example, while Google controls almost 60 percent of all Internet-based search queries, Yahoo! owns just 21 percent of that market. More problematic, Google earns about twice as much per search-related advertisement as does Yahoo!, putting them even further apart from a revenues perspective. And the companies are trending in opposite directions: Google is gaining share while Yahoo! is losing share.
Yahoo! has looked into a variety of tie-ins with other Internet companies, though it's unclear how these deals will address Yahoo!'s core problems. It has tested a scheme in which it will outsource part of its Web search business to Google, a deal that both raises antitrust concerns and undercuts its own technologies. And it has examined a merger with AOL, a deal that would simply combine two Internet also-rans and consume Yahoo!'s management at a time when the company needs to move quickly.
Yahoo!'s quirky personality was fun when the company was riding high. But "Chief Yahoo" Jerry Yang is going to need to do more if he's serious about turning the company around. Consider a bizarre post Yang made yesterday to Yahoo's corporate blog, in which he described the previous quarter as "one of the most exciting quarters in \[Yahoo!'s\] history in terms of delivering innovative products and services that really move the needle and make a difference for \[its\] users and customers." So what did Yahoo! achieve in that quarter, you ask? They acquired Maven Networks; launched services like Buzz, OneSearch 2.0, voice-activated mobile search, video on Flickr, and Shine; previewed AMP! from Yahoo! and SearchMonkey; and added more Newspaper Consortium members. Never heard of any of that stuff? Not particularly excited by it? You're not alone.
Yang says that with the Microsoft merger out of the way, Yahoo! will continue to execute on the plan he put in place last year, as if "stay the course" has ever worked for a sinking ship. And unless Microsoft comes knocking again--which it could, it Yahoo!'s stock falls hard enough and Yahoo!'s shareholders complain enough--then my guess is that the company's days are numbered.