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Ballmer blinks but search still suffers

Posted by Michael Martinez on May 4, 2008 in General

Now that Steve Ballmer has thrown in the towel and given up on buying Yahoo!, people are free to engage in artisitic analysis about what might have happened. Based on Ballmer’s statements in various statements to Yahoo!, Microsoft employees, and the media, it appears that all he really wanted was to capture Yahoo!’s PPC advertising revenues.

In one of Ballmer’s most recent statements he assured Microsoft employees (some of whom have expressed dismay and concern to friends outside of Microsoft) that the search engineers would stay in place at both Yahoo! and Microsoft. That strategy makes no long-term sense.

Yahoo! has more hardware and data center resources devoted to search and Web-related services than Microsoft. Absorbing Yahoo! and leaving those resources untouched would leave the Live and MSN brands at a disadvantage, which would eventually force Microsoft to make some hard choices. If they did not pursue the efficiences to be gained through economies of scale, Microsoft-Yahoo! would be operating two competing companies.

Competing with yourself when you’re trying to take over the number 1 position in a market is not a winning strategy. If the merger had gone through analysts and marketers alike would have been pressuring Microsoft to either drop the Live Search and AdCenter brands or to drop the Yahoo! Search and Yahoo! Search Marketing brands. They are much too similar for any coherent strategy to maintain them as competitive players.

If Microsoft were to leave the competing brands in place both would continue to grow at their much-too-slow pace to compete with Google. If Microsoft’s leadership were capable of infusing search with the technological innovation and brand value that can challenge Google, Live/AdCenter would be gaining ground now rather than merely holding its own. If Yahoo!’s technologists could challenge Google they would be gaining ground now, but they are not.

The simple truth is that the search market is founded upon consumer sentiment, not financial analyst number-crunching. The proposed merger offered absolutely nothing positive to search consumers because they would have seen the combined Microsoft and Yahoo! as one brand. They would have eventually abandoned one for the other or both for Google.

Marketers would have demanded access to both advertising networks through one interface. Right now PPC specialists have to log in to three services to manage client spend campaigns, and when you’re uploading thousands of keywords you’d rather do it twice than thrice. The combined advertising networks would have worked for some marketers but other marketers would have run into the audience diversity issue.

Google’s hard core users tend to be more technically oriented than the hard core users Microsoft and Yahoo! have gained. People can agree on that much but from that point forward the question of search demographics becomes murky. Many of us feel strongly that more women than men spend time on Microsoft properties because of MSN’s entertainment-value approach. Many people feel that Yahoo!’s properties are more favored by business people because of their long track record of providing business-friendly content.

Men like entertainment too but MSN’s entertainment content doesn’t seem to have as much macho-appeal as other content providers. MSN competes better with iVillage than with AskMen.

Women operate businesses, make business decisions every day, and follow the news but Yahoo!’s offerings just seem to be more conservative and corporate than Microsoft’s.

While these subjectively identified differences might seem to complement each other in the spreadsheets, they reflect different editorial opinions and competitive strategies. To leverage the resources Microsoft would have had to develop a new editorial policy and marketing strategy.

Any number of possible strategies and policies could have emerged from the merger but consumers might have been faced with years of bad strategic testing, which would ultimately result in the erosiion of the combined user base. In a merger of this scale, you really only get one opportunity to realign your assets correctly.

Steve Ballmer’s focus on the advertising network all but guarantees that he would have ignored the conflicts between the content and search assets both companies possess until it was too late. Instead of leaving them in place to compete with each other, he would have to bring them together to forge a new entity that didn’t previously exist.

With more than 100 million unique visitors per month at both Yahoo! and Microsoft, the new company would have had a brilliant opportunity to export a new brand value and message to consumers, but Steve Ballmer appears to have no intention or desire to shape a new world of search. He only wanted to increase Microsoft’s share of the search advertising pie.

Without new brand value to consider, consumers would not have wanted to maintain loyalties to the equal-but-separate Microsoft brands. There would be no serious prospect of improvement or growth in innovation, service, and technology.

Steve Ballmer’s greed and the greed of marketers who might have demanded unified access to the advertising network would have diminished the separate brand values Ballmer pledged to preserve at both Microsoft and Yahoo!. There would be no way to stop the exodus of engineers who read the writing on the wall. There would have been no way to prevent the inevitable jockeying for decision-making power between the competitive marketing and strategic staffs.

In time, perhaps no more than two years, Ballmer (or his successor — he seems to proven to be one of the sorriest CEOs in large corporate history) would have had to kill one brand set or the other. Microsoft would have no chance to compete with Google as dual personalities. In fact, if the merger had gone through, the sooner the brand deaths could have occurred the better.

In the short run such an analysis might have ignited shock and anger among Yahoo!’s faithful supporters, but Ballmer has committed to taking on Google. He will only succeed — if succeed he can — by building a single, unified brand and marketing strategy. His blunder in this pursuit was to hope for control of larger advertising revenues.

Google can only be toppled by consumer interest in a different brand. Consumer interest in a different brand will only achieve significant levels when consumers find a brand that they feel is fresh, focused, well-managed, and capable of delivering a superior service overall. Microsoft can achieve more toward that end by investing in the technology it needs to compete with Google rather than by investing in a second brand that it would promise to keep alive.

With Ballmer’s capitulation in this bizarre and badly-timed takeover attempt. search consumers continue to have more choices. Google’s real market share probably remains at no more than about 40%. Any erosion in Microsoft and Yahoo!’s real market shares would undoubtedly push Google beyond the 50% mark.

The search industry can change kings quickly if need arises but the new king won’t be a search company that does everything wrong. If Ballmer wants to compete in search he has to focus on search and not on advertising. For now, the engineers will stay in place at both companies but the emotional bruising they have all experienced may result in a few key departures.

The chase after Google must focus on what the consumer wants. The sharp rise in time spent searching on Google seems to imply more than anything else that people are struggling to find what they want. There have been increases in queries per user at both Microsoft and Yahoo! as well. The consumers are apparently demanding better search.

Unfortunately, none of the major search engines seem to be listening. There is a very real opportunity here for an entirely new player to come out of nowhere and topple Google while everyone is asking what Microsoft and Yahoo! will do next.