More on Live cashback

Rav said:

May. 21, 5:09 PM

The key question to ask here is who is paying for the cashback. If we assume that its the advertiser, then what's stopping the same advertiser from offering the same deal on Google? If its MSFT paying a significant portion of this cash back, then I don't see how this is good for the MSFT shareholders because it will be a drain on its cash-flow. If the search share improves it will only be temporary, until this promotion is on. This has been the case in past attempts by MSFT to pay the searchers. Most people will still go to Google for search and some will go to live just for the cashback, only after confirming that the deal is better than what they find on google.

The feature itself is not new. There are tons of sites which already offer price comparison and rebates. The price comparison sites will be fine, because they can just combine their results with the results from live, and tell the consumer about the best deal, which in some cases may end up on live.

Its bad for the advertisers because it will squeeze their margins if they have to foot the bill for the cashback. Its fine for the advertisers as long as MSFT provides the service and foots the cashback bill. The moment this stops, the advertisers will bail. Footing the bill forever is not sustainable for MSFT. Its already losing billions on its online efforts and spending on cashback would make the situation even worse than it already is. Its bad business because the amount of money MSFT loses would be directly proportional to the growth in its search share. Google didn't grow big by losing money dotcom style. In fact they were consistently profitable throughout their brief history.

How would GOOG respond?

Rav said:

May. 21, 3:38 PM

I agree that this is a direct and I would say somewhat irrational attack by MSFT on GOOG's cash cow. Gloves are off now. I think the way GOOG would respond would be:
1. Be more determined and aggressively go after the YHOO ad outsourcing deal. MSFT has made it obvious by this move, that their real intention behind getting the scale on internet search is to kill the market, not milk it. This is what GOOG guys are afraid of. They don't mind competition as long as its fair and based on merits and not on subsidy. This is also the reason that Yang is reluctant to sell out to MSFT.
2. Undercut MSFT with Google apps. I wouldn't be surprised if they soon provide a fully functional offline office applications package, without requiring gears and internet connection.
3. Go after the WIN XP and Vista markets. I think with Vista getting bad reputation and the significance of OS waning, now may be a good time for Google to get into this market as well. There is a lot of demand for low cost desktops all over the world. This can be their opportunity to hurt MSFT's cash cow. They already have some experience in the OS domain with their work on android and also have a strong brand.

Who suffers?

Rav said:

May. 21, 12:59 PM

On a more serious note, if MSFT continues this for a long time, offline retailers and etailers may both suffer significantly. They are already facing margin pressures due to inflation, falling dollar and a bad economy. If I was AMZN, circuit city or best buy, I would be a lot more worried about this, because once smart folks, the kinds that frequently visit fatwallet and slickdeals, figure out that they can save some $$ going thru live, they would never purchase directly from the AMZN or CC website. The advantage of live would be short-lived because sites like AMZN will demand better deals from the manufacturers or cut their margins.

GOOG may suffer from a perception that this may change the game. But reality is that their business model is quite adaptive because the advertisers bid against each other. If a few advertisers leave, there are a lot more, who are currently losing the bids, that can take their place. Meanwhile if you are looking to buy that fancy camera, here's your chance to go live. Take advantage while it lasts. Reminds me of the webvan and pets.com days.

Lame humor attempt

Rav said:

May. 21, 12:31 PM

In related news:
- MSFT plans to introduce live-pal to compete with paypal. People will get paid to use this service.
- MSFT plans to introduce live-list to compete with craigslist. People will get paid to post ads there.
- MSFT plans to introduce live-bay to compete with ebay. People will get paid to put up auctions there.

Where is all this money going to come from you ask? MSFT is introducing a super-duper-ultra-plush-ultimate-premier version of vista for $499.99, which would be a standard requirement for all future PC buyers that still want to buy XP.

Rearranging the deck chairs on the Titanic?

Rav said:

May. 21, 10:14 AM

Here is a relevant article talking about past attempts by MSN and A9 to kick-back some cash to searchers.
http://blog.searchenginewatch.com/blog/051227-121401

Somebody wisely said, "Those who forget history are doomed to repeat it". Based on failed past attempts, it sounds more and more like an attempt to re-arrange the deck chairs on the Titanic, rather than some truly innovative and disruptive technology. Perhaps folks at MSFT working on this got confused about what disruptive technology means and instead took it literally and decided to disrupt their own already failing model.

MSFT attempts to bribe searchers

Rav said:

May. 21, 9:31 AM

Hasn't Amazon.com already tried this with A9 search engine? Does anyone even know what A9 is anymore? AMZN was in best position to capitalize on this "seach for bucks" trend, since it has a huge retail business model. But it failed.

Also MSFT has tried this earlier on live.com, with a temporary bump of couple of percent points in search traffic, which then reverted back to even less traffic than before the gimmick. Its like hoping that zune will take hold against ipod if only they give couple of bucks back to everyone who buys a zune

Deal or No Deal

Rav said:

May. 20, 11:23 PM

Did anyone notice that YHOO is awfully quiet on the latest discussions with MSFT? All the noise and leaks are coming out of MSFT. Only thing new from YHOO was, "Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time." This protects YHOO against the activist shareholders and those filing lawsuits.

I doubt that any of the MSFT proposals that have been leaked so far are being seriously considered by YHOO. All of them seem less attractive than selling the company outright for around ~$37- that YHOO is looking for. I think as Henry mentioned somewhere, all these leaks from MSFT is just a face-saving maneuver and a way to signal to the activist shareholders that it is still interested and would support them at the appropriate time. It is also designed to postpone the nuclear option for the time-being and buy some more time. The nuclear option being YHOO signing up a long term deal with GOOG, shutting out MSFT forever.

By the same reasoning, GOOG and YHOO are not too keen on exercising the nuclear option unless they are forced to, because its effects are unpredictable and it may backfire. It works better as a threat and has deterrence value as has been amply demonstrated. I think they will exercise it closer to the shareholder meeting and only if it looks like the proxy fight has a reasonable chance of succeeding. Until then it will be just some more hot air from MSFT, unless they decide to cave in and bite the YHOO bullet for ~$35+. At some point Ballmer will realize that every-time he takes some action and makes some announcement, MSFT stock drops another 2-3%. He may decide to take the pain in a single-shot and acquire YHOO on the terms that Yang is asking for. The recent comscore numbers for both YHOO and MSFT are alarming, so he must soon feel some sense of urgency.

I doubt that GOOG will resist the transaction if MSFT ends up paying ~50B$. In fact it may covertly encourage it while overtly opposing and delaying the deal consummation, at least until the new president is sworn in.

Likely outcomes

Rav said:

May. 19, 11:57 PM

The goal of MSFT and GOOG is to slow down and stop each other in their respective strong markets. They are looking at it as a zero-sum game, which is really the problem here. If they just don't compete with each other and enjoy their respective monopolies, they both would do much better. Its easier for GOOG because it has a stronger hand and a growing market. Its more difficult to accept for MSFT as its kingdom is getting smaller and weaker everyday, as its bread and butter markets are maturing.

MSFT's advantage is that it has a much stronger balance sheet and is more diversified. However, this is also the reason that GOOG will do everything in its power to make it difficult for MSFT to get a toehold in the online marketplace. YHOO is just a pawn, means if you will, in the process. So both MSFT and GOOG would want to structure the deal in a way that is exclusive for all practical purposes and leaves out the competitor. GOOG can easily do this because its confident that it can win in a fair and open marketplace due to its technological superiority and network effects. MSFT doesn't have the same confidence. So its trying to come up with a complicated deal which locks up YHOO and allows MSFT to milk YHOO's search marketshare.

Continuing on my analogy in yesterday's comment, now that MSFT can't buy the car, its negotiating the leasing terms with YHOO. Its trying to obfuscate YHOO with the details on down payment, interest rates, monthly installment and so on. But it is missing one important detail. YHOO is the dealer here and MSFT is the hostile buyer, so YHOO will get to decide the terms. And YHOO has some leverage because it already has a friendly and willing buyer in GOOG. There are no angry shareholder lawsuits to fear at YHOO, because the stock has recovered quite well and the board seems to be doing its fiduciary duty by creating alternatives to MSFT bid.

Carl Icahn understands all this very well. The 120M$ that he is up by so far, is peanuts for him. I would be surprised if he makes anything less than 0.5-1B$ when all is said and done. The best position for him to be in is to bid MSFT against GOOG and drive up the YHOO price. GOOG won't mind because it is an insurance policy for its cash printing machine. However, for MSFT it is hard-earned cash accumulated over years that its betting on a coin toss. This is the reason that everytime Ballmer issues a statement about this deal, MSFT stock drops at least 2-3%. This is irrespective of whether he says he is walking or staying.

Most analysts are missing the point that Yang is in a stronger position and its Ballmer who is confused about the next course of action every day. This also explains the whole spectrum of comments coming out of MSFT that leave all options open. I still believe that most likely outcome is either MSFT panicks and pays ~$35 for full acquisition of YHOO in a friendly deal or YHOO signs a long term deal with GOOG in a way that shuts out MSFT from the search marketplace forever. Everything else that happens in the interim would be posturing by different parties

Some wild ideas

Rav said:

May. 19, 7:23 PM

http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article3965206.ece

Seems like Brin wants to hire Yang, in case YHOO shareholders fire him. That's an interesting idea. In that scenerio, some key Yahoo engineers can follow Jerry into GOOG. MSFT and Icahn can then fight over how to split the servers, properties, buildings, parking lots and equipment that cost them billions to buy.

Another wild idea: Ebay should partner with YHOO and auction off individual pieces of YHOO to highest bidder on Ebay. They should only accept paypal for those pieces. This should give a revenue bump and fix Ebay's problems as well. :-)

Icahn's involvement

Rav said:

May. 19, 1:39 AM

@xfactor

Here are my earlier comments regarding Icahn's involvement:

http://www.alleyinsider.com/2008/5/yahoo_to_icahn_you_don_t_get_it_#comment-482d0cab796c7aeb00121455

http://www.alleyinsider.com/2008/5/meet_carl_icahns_yahoo_yhoo_board_icahn_frank_biondi_mark_cuban_seven_more#comment-482c7a5814b9b97e00cdc151

Icahn ready to switch horses?

Rav said:

May. 19, 12:17 AM

Sounds like Icahn is ready to switch horses. Henry, this latest development deserves a new article imho. From the reuters link, a person familiar with Icahn's thinking says, "Microsoft is trying to get the milk without buying the cow".

This confirms my view expressed earlier that Icahn will try to make is more expensive for MSFT.

http://www.reuters.com/article/marketsNews/idUSN1849884420080519

Microsoft's New Deal

Rav said:

May. 18, 11:51 PM

Let's review this step by step:
1. Jan30th - MSFT announces a low-ball bid for YHOO, picking the most vulnerable time for YHOO. The result MSFT stock drops about 10%, YHOO up about 45% since then - still no deal. Score MSFT (0) - YHOO (1)
2. May3rd - MSFT walks thinking that YHOO will tank to the teens with no bid from MSFT and that'll show them Yahoos! Surprise surprise - YHOO and MSFT stocks virtually unchanged since then. Score MSFT (0) - YHOO (2)
3. May18th - MSFT panics at the fearful prospect of a world in which GOOG and YHOO are partners. The deal seems imminent within days based on leaks from both YHOO and GOOG. Icahn proxy fight acts as a catalyst to speed up this process. Something needs to be done and fast. And this is the best they can come up with? No wonder they are so screwed.

Let's parse the statement:

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.",

Our plan of "walking" failed miserably as demonstrated by the stock market. YHOO is getting cozy with GOOG and this is our last chance. Hopefully we don't screw-up this time.

"Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

We can't afford YHOO at the current price and valuation guarantees that YHOO BOD is looking for, without screwing our stockholders even more than we already have. We'll try buying again if Icahn can do the dirty work for us, (Icahn - wink, wink) and hands us YHOO on a platter. Until then, since we can't afford the car, we'll try to lease it.

"There of course can be no assurance that any transaction will result from these discussions."

Of course we are not sure if we can ever lease the car since we pissed off the dealer and there is dealer's cousin (GOOG) who already wants to lease.

Yahoo's response to the latest FUD from MSFT:
- You can't buy us, nanny nanny boo-boo...
- You can't buy us, nanny nanny boo-boo...

I think what really happened here is MSFT no longer believes in its convenient argument so far that DOJ would try to block any YHOO-GOOG deal. Its panicked about this possibility and is having nightmares. It realizes that GOOG is smart enough to structure the deal in a way that addresses any DOJ concerns and get a kind of pre-approval for the deal. Look at their performance in the FCC wireless spectrum bids and closing of doubleclick.

Also, they are indicating some support to the Icahns and Paulsons, hoping they can win the proxy fight. Next month should be very interesting, because MSFT may go further and try to get actively involved in the proxy fight if YHOO spurns them again and signs up with GOOG, which is a very real possibility.

Also it gives a potential brownie point for GOOG, if it can prove that MSFT's proposal for partnership with YHOO is non-competitive and its own proposal is more open and competitive. This should probably make the approval from DOJ and the job of selling the deal to YHOO shareholders easier. So my expectation for the score tomorrow -
MSFT (0) and YHOO (3).

Yahoo and Google deal?

Rav said:

May. 17, 12:35 AM

Of course in an ideal world, YHOO would prefer to continue with its merry ways and won't like to capitulate and sign a deal with GOOG. I believe that is part of reason for the resistance that they feel. That's also the reason that so far they didn't feel an urgency, especially after MSFT walked. But with Icahn breathing down his neck, Yang doesn't have the luxury of time. This would change the equation and force a deal with GOOG sooner rather than later.

Both Henry and joeblow have missed one probable reason why the deal hasn't been announced yet. Its the last and most potent bullet that YHOO has in its arsenal, to keep YHOO independent. So the timing of the deal is very important. I think they will try to time it in a way that takes the air out of Icahn's sails - probably closer to the proxy fight. Communicating with regulators to get their approval a priori, might also add to the delay.

GOOG is certainly not in a hurry to do this, since its primary interest is in keeping YHOO away from MSFT's clutches. Since MSFT walked, it made sense to go slow on this deal. But now that Icahn has added fuel to the fire, it has suddenly become urgent. That's what I mean by Icahn being the catalyst.

I don't think GOOG is in it for the money. The strategic importance of keeping YHOO independent is lot more than the financial interest. I think YHOO and GOOG can easily work out the long-term / short-term and other details of the deal, since their goals are same - to keep YHOO independent. The only tricky part is that YHOO would still have to at least pretend to make sure that it doesn't preclude or affect other future transactions.

From Bostock's letter "As we have publicly stated, our board continues to actively and expeditiously explore strategic alternatives to maximize stockholder value. None of the alternatives we are considering would preclude us from entering into a transaction with Microsoft or any other party."

Potential Outcomes

Rav said:

May. 16, 12:15 PM

Carl Icahn is nobody's tool. In fact with his opportunistic involvement he has made a tool out of YHOO and MSFT. He would just act as a catalyst to force a quick outcome. If YHOO panicks first then it would sign a deal with GOOG. Carl will make about 4-5$/share with this outcome, not a bad deal for him, for couple of weeks of work. If MSFT panicks, then they pick up YHOO at ~$35/share with Yang on board. This would be a better outcome for Icahn. In either scenerio MSFT would be a loser and YHOO and GOOG would be winners.

In the low probability case that nothing happens in next couple of months, YHOO will trade close to $25-26, MSFT remains virtually unchanged and Icahn doesn't lose anything. So its a ~free arbitrage opportunity for him.

Yahoo's value

Rav said:

May. 16, 12:55 AM

@purple haze

YHOO has a lot of potential value which hasn't been realized by current management. Its like a diamond in the rough, which can be quite expensive after it has been properly polished. MSFT is not stupid to have offered $33/share if they really believed that YHOO was worth $19. You have to remember that when MSFT made the offer YHOO had just come out of a bad quarter and all tech stocks were crashing. So 70% premium in that context is meaningless. Hell, by that logic, AAPL is trading at a 65% premium over its $118 price just a couple of months back and this is without any offer.

You really have to look at YHOO price within last couple of years. Its been mostly in the $25-30 range. Also, in last couple of years WEB2.0 has caused a price inflation in internet companies. Youtube today would at least be worth 5-7B$ as a stand alone property. Facebook is close to 10B$.

Considering all this and the fact that MSFT needs YHOO more than the other way round (scarcity value), I think the Yahoo board - (Yang included) did indulge is sincere negotiation, at least in the last couple of weeks before the deal fell through. I think the reason for deal failure is lack of commitment from MSFT side and also potential concerns about integration issues with a hostile Yahoo.