Microhoo: Strategic or Panic Diversification Move

On February 1, Microsoft made its famous unsolicited bid for Yahoo.  Much has been written about this proposed acquisition and folding-in of one of the largest anti-Microsoft cultures into the belly of Microsoft itself.  Two of the deepest thinkers include Robert Hacker and TechCrunch.  Can Microsoft win the bid for Yahoo?  Will the bid from Microsoft increase substantially?  Does the acquisition make sense?  Will another suitor arise who can either out-bid Microsoft or offer a better strategic alternative?  If the acquisition occurs, can it be successful?  These and other questions are being contemplated and opined in many venues.  My main question is whether this is a strategic move or panic by Microsoft.

Microsoft’s core is programming.  The internet threw Microsoft a curve-ball and they are doing a decent job of catching up in many of those areas.  However, their core is losing some of its panache and steam. 

Silicon Valley has long avoided Microsoft’s technology stack in favor of open source, using databases such as MySQL instead of Microsoft SQL Server, and Ruby on Rails, instead of Microsoft’s .NET platform.  In Seattle, where you would expect Microsoft to dominate, though there is much Microsoft .NET development happening, a slow shift is happening to open source, and eventually this movement will erode Microsoft’s market share.  These same developers are also favoring MacOS over Windows Vista and iPhone to SmartPhone technology. 

The internet is slowly becoming an operating system and Google Docs is gaining steam against Microsoft’s core Office products.  Bill Gates opined that eventually owning content itself is more valuable than tools and software products, which enable the use of the content. 

Many believe that Microsoft’s unsolicited bid to buy Yahoo is a desperate move to own more of the web audience than a strategic decision to bolster their core business.  Most of the revenue from these audiences is generated through internet advertising.  And though internet advertising is growing significantly, there are other forces at work, which can be extremely harmful to buying properties such as Yahoo.  Case in point is IE7Pro, which can not only block popup ads but it also blocks static and flash animated advertisements.  If tools such as these become prolific, revenue shortfalls will be devastating for companies such as Yahoo, whose main source of revenue is online advertising. 

All good businesses have good revenue growth potential, profit growth potential and diversification potential.  The question here is whether Microsoft buying Yahoo is a good strategic diversification move or panic diversification move.  I’ll let you decide.