Microsoft’s proposed acquisition of Yahoo is reminiscent of the consolidation in the newspaper industry over the last few decades — combining traditional media businesses together to achieve efficiencies and consolidate market share. The problem lies in the vision (or lack thereof) for the newly combined business. Without a coherent vision, the combined web-based businesses will not be viable long-term against competitors like Google.
The main issue with the Microsoft and Yahoo combination is that in the online channel, they are both traditional media companies. Both rely on closed, centralised control models — rather than open, distributed network models. Both Yahoo and MSN control content, market to bring in audiences, and then inundate them with ads. Few Yahoo and MSN products are constructed so that their content can be shared with others. This closed model makes both Yahoo and MSN traditional, old style media.
The web will increasingly be dominated by media – particularly user-generated media – served via open, distributed networks. And while Yahoo has some interesting distributed network properties – like Flickr and Yahoo Answers – such properties are not coherently integrated. Only recently – after co-founder Jerry Yang replaced former movie studio boss Terry Semel as CEO – has Yahoo moved toward sharing more of its content via open, distributed platforms. This new strategy came too late to stem a two-year drift in stock price – precipitating the acquisition bid by Microsoft.
Microsoft has fared no better in the online channel. Arguably Microsoft should understand better than others the power of network effects. The company used such to create both its monopolies in PC operating systems and desktop software – but both monopolies were built using old-style, closed networks. The company still lacks a single online application that dominates via an open, distributed network the way that Google does with contextual ads and video (via YouTube). MSN’s most successful products – Hotmail and Messenger – run on traditional, closed platforms.
Both companies are therefore not aligned with the grain of today’s web, which is fundamentally an open, distributed network. As such, they do not benefit online from network effects, which is precisely what powers Google — and why open platforms will likely beat those offered by a combined Microsoft/Yahoo.
Online media used to be about centralised, tightly controlled silos. Now it’s about loosely affiliated, open and distributed networks. The type of traditional media business thinking that drive Microsoft and (until very recently) Yahoo is difficult to break. What drives the success of Google and other newer style media companies is completely counter-intuitive from the perspective of what drives traditional media businesses.
The future of the web will belong to companies that open their platforms to create network effects — and particularly to those that can become the network itself. Older business like Microsoft and Yahoo can evolve and survive online, by only through a radical change in thinking. Such radical change, not consolidation, will better guarantee their future.