Will Microsoft Buy Yahoo!?

Justin Post, a research analyst at Merrill Lynch, issued a report today indicating that Microsoft should consider buying another Internet Titan, specifically Yahoo! or eBay. The report, entitled "MSFT/Yahoo! combination: theory...for now," indicates that the current valuation of Yahoo! and eBay makes the acquisition attractive for Microsoft, and would immediately enhance their own internet offerings. "Worst case, an acquisition of eBay or Yahoo could cost Microsoft $5 a share if completely unsuccessful," wrote Mr. Post. With $34 billion in cash on hand, Microsoft could easily afford such a large acquisition. Post indicates that the likely acquisition scenario would be Microsoft paying $20 billion in cash, and funding the rest with debt.

The acquisition of Yahoo! would put Microsoft in a much stronger position to compete with Google in the online search and advertising markets. A combined Yahoo! and MSN would give Microsoft roughly a 41% marketshare of all U.S. search queries and 29% of worldwide search queries. Today, Google has 44% marketshare for U.S. search, and 61% share worldwide. Additionally, acquiring Yahoo! would eliminate one of Microsoft's largest Internet competitors. Post writes "We think the combined entity would realize operating synergies in product development, content licensing, S&M and G&A."

This all sounds well and good, but it is worth calling out the following:

Post doesn't own shares of Microsoft, Yahoo!, or eBay, but Merrill Lynch intends to seek an investment-banking relationship.

So what does this mean? I don't know, but a few possibilities come to my mind:

1. Discussions between Microsoft and Yahoo! are further along than what has been reported, and Merrill Lynch is releasing this report to see what type of reaction Wall Street and the public have to this type of acquisition.

2. Merrill Lynch is publicly courting Microsoft's business by providing data points that indicate this is a sound business move, and are, of course, ready to provide the investment-banking services if and when Microsoft is willing to proceed with this acquisition.

3. Merrill Lynch has no real evidence that Microsoft is interested in acquiring Yahoo! and this is just a publicity stunt.

I do think that Google is arguably Microsoft's biggest threat, and it is unclear if Microsoft has all the assets to compete effectively. The research I've done indicates that Google is having another strong quarter, and shows no signs of slowing growth.

Paul Misener: My Hero

As an agnostic, it is extremely rare that I use the phrase "Thank God for...," but I'll say it anyways, "Thank God for Paul Misener." Paul Misener is Amazon.com's Vice President for Global Public Policy. This guy is super smart, and has the ideal background for this position: he earned a B.S. degree in Electrical Engineering and Computer Science from Princeton University (as did his boss, Jeff Bezos) and a law degree from George Mason University School of Law, from where he also received the 2001 Distinguished Achievement Award. He is responsible for Amazon.com's public policy positions worldwide. He is also President of the Internet Commerce and Communications Division of the Information Technology Association of America and a member of the ITAA Board of Directors. Rest assure this guy is not cladding jeans & sneakers while sitting behind some door desk in Seattle pondering how to improve Amazon's public image: he lives and works out of Washington D.C. battling the good fight against the Big Boys. Or at least he's out there promoting Amazon's best interest, as he's paid to do, but in this case our interests are aligned, and we should feel very fortunate to have someone of his caliber as a key leader and defender of net neutrality. Listen here as he debates Mike McCurry, co-Chair of the telecom-backed Hands off the Internet campaign on net neutrality.

Compromise on Net Neutrality Introduced

It's been interesting watching the showdown between the Internet Titans and the Telco Titans over net neutrality in Washington D.C. The telcos and MSOs have held the upper hand not least of which because their other hand has been stuffing the pockets of politicians for decades, not just years like the Internet companies. Most of the expert communication lobbyists in D.C. have already been bought up by the Telcos, and the ones who haven't are too afraid of lobbying on the behalf of internet companies out of fear they will be punished by the loss of future business. Business Week does a good job of describing the situation on the ground. The Internet companies' inexperience in the ways of Washington is underscored by Sergey Brin's feeble attempt to directly lobby lawmakers clad in jeans and sneakers: a rookie move if there ever was one. No doubt the internet companies will become more sophisticated in their lobbying efforts, and lets hope sooner rather than later, but until then, a compromise is needed. Fortunately, a compromise may happen soon that will enable legislation to be passed this year.

Senator Ted Stevens of Alaska has amended his proposed bill that includes language preserving consumers' ability to surf anywhere on the public Internet. According to Reuters:

Stevens' compromise would also create a complaint process through the FCC if consumers believe their access rights were violated and the agency would be authorized to adjudicate complaints with penalties, according to the draft. However, the FCC would be barred from issuing any regulations under the new law that would add to the obligations on Internet service providers.

You can read more about the story from C|Net here.

AT&T Now Offering Naked DSL

AT&T is now in compliance with a key government requirement for the merger with SBC: offer stand-alone DSL for a minimum of 2 years. The price is $44.95 per month. The price of bundled phone line with DSL: $45.95. Obviously, this is not much of an incentive for customers to drop their phone line, which is precisely the point I suppose. Speaking of DSL, you can now find all high-speed internet options for your home at Amazon.com. I have 3 different options: lets hope for more broadband competition, as only this will cause the telcos and MSOs to start doing what's best for consumers, and not just for themselves.

Netscape's 9 Lives

For those of you who've been working in the internet industry for many years, it may bring feelings of nostalgia reading the latest headlines about the newest incarnation of Netscape. Netscape has always been the perpetual internet underdog - even in it's hey day when it dominated the browser market, it never generated meaningful amounts of cash. Netscape first released the beta versions of its browser in 1994, and peaked towards the end of 1995 with over 80% market share. Today, under AOL's stewardship, it has a 1% market share.

In an ironic twist of fate, Netscape now finds itself in a position of dominance. But alas, its challenger is no longer Microsoft or other Internet Titans; it's found itself a worthier challenger, a young internet startup that launched in December 1994, Digg.

Digg is a website with an emphasis on technology and science news. It combines social bookmarking, blogging, and syndication with a form of non-hierarchical, democratic editorial control. News stories and websites are submitted by users, and then promoted to the front page through a user-based ranking system.

This week Netscape launched in beta a new portal that mirrors substantially Digg: users can submit, and then vote for, new stories that are promoted to the front page through a user-based ranking system. The man behind this reinvention of Netscape is Jason Calacanis, CEO of Weblogs, Inc., which was acquired by AOL in October 2005. In interest of full disclosure, I know Jason, and did some business with him a few years ago. I can appreciate his efforts to reinvent an old-school Internet brand into a new media brand. However, I don't think this will meet with much success, and certainly won't be the "Digg Killer" as Michael Arrington suggests. The Netscape brand has been diluted to the point of no return and no amount of lipstick can beautify this pig.

Below is an Alexa chart comparing the site traffic of Digg and Netscape. The trends speak for themselves.


You can read Digg's CEO Jay Adelson response to Netscape here.