Microsoft's AOL or Microhoo?

February 1, 2008: 1:36 PM ET

By Josh Quittner

The idea that Microsoft would take Yahoo as its hapless partner has been discussed for years down in the Valley. But most of the folks I've talked to pretty much dismissed it as too wrong to contemplate. Even Microsoft, dissed by Valley Guys as not getting the Web (see previous column here), wouldn't actually go through with it, Yahoo's decent dowry notwithstanding.

Granted, this part of the world is unabashedly Google Country. Virtually any startup that's hot right now (Facebook being the exception that proves the rule) is making its money in Google's slipstream.

Microsoft (MSFT) does nothing for these people. So it's an admittedly biased sampling. That explains, in part, why, when news of the Microsoft offer broke at dawn on the Pacific this morning, most of us awakened to hoots of derision, rather than the crowing of roosters.

The Valley view, then: Yahoo (YHOO) will be Microsoft's AOL. Microsoft is paying too dearly for too little. When AOL and TimeWarner (TWX) merged, the Street went crazy with the wonderful possibilities that the synergy would bring: Combine AOL's online reach with TimeWarner's content? What a no-brainer! A no-brainer is right.

In the same way, this is a deal that smells right to the same crowd -- Microsoft comes away with 30 percent of the search market and $1 billion in "cost synergies." And, while the recession is already hitting advertising, we can assume that the online world will only benefit over time as the flow of ad dollars increases. But sniff deeper and longer, and this thing begins to be redolent of the AOL-TimeWarner "synergies" that at first appeared so sweet.

What exactly is Microsoft buying here? Technology? Yahoo has been managing a declining asset since Google invented a better way to do search, then figured out how to sell (And sell! And sell!) relevant ads against its superior results. Technologists? Talent has been fleeing Yahoo Central since Terry Semel got there -- and the fact that co-founder Jerry Yang returned to get the company back on track hasn't yet lured any of those Smart Dudes back. Nor will it: Smart techies only want to work for startups these days. And let's not even talk about the clash of cultures that such a merger will surely create.

Nope—Microsoft is buying an empty bag. At the risk of climbing even further out on a limb here, let me make an alternative suggestion. Microsoft should move in the opposite direction: Unbundle what it already has. Get rid of everything that isn't core! Microsoft is the monopoly provider of desktop operating systems. Guess what? It's a great business! (Or would be if it did a better job of improving it rev to rev. Vista was a disgrace.)

Want to juice the stock price? Get rid of everything that's unrelated to the business of improving the OS -- search, xBox, Zune, etc. That OS, by the way, is quickly starting to move up into the cloud. It'll be enough of a challenge to maintain Windows's dominance as that happens.
It will take incredible focus and innovative thinking to maintain Windows. Don't get distracted by Google (which, by the way, ought to get back to it's knitting, too. Targeted search is a great business. Google (GOOG) ought to get out of everything else and it's stock price would double.)

If we've learned one lesson during the past decade it's this: Technology is changing so fast that the "synergy" that's supposed to occur when massive companies merge simply doesn't work. The Internet belongs to the small. Unbundle now -- before it's too late.

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