Real Kato Blog: We might have to go through with this thing after all

Flush the bombers, get the subs in launch mode. The on-again, off-again Microsoft-Yahoo merger might be on again.

A lot has already been written about the proposed merger, and my overall take is that most business guys seem to think it's a great idea, and most technology guys seem to think it's a terrible idea. Both arguments have some merit. I figured I'd take a little time to explore the pros and cons.

The idea behind the merger is to give Microsoft a stronger position to compete against Google for internet advertising dollars. While even a combined Microsoft and Yahoo would still have a smaller web presence than Google, together they might just be large enough to have influence. And that's the real goal, at least at the start: Microsoft must do what it can to avoid being completely irrelevant in terms of the Internet. (Funny that Microsoft's challenge against Google is the same as what Apple's challenge against Microsoft was, some years ago, in the operating systems arena.)

On paper, Yahoo is exactly what Microsoft needs. Yahoo has some of the biggest web properties around, including Yahoo Instant Messenger, Yahoo Mail, Yahoo Games, Yahoo Answers, Yahoo News, and Flickr. By acquiring these properties, Microsoft is suddenly relevant in a half a dozen areas where before it was moribund.

On Yahoo's side, the stockholders get a large premium in stock price. While Microsoft doesn't have much technology to offer to Yahoo, it does provide the possibility for economies of scale. And Yahoo is also worried about slipping into irrelevancy behind Google; a merger seems like a way to stave that off.

So good for everyone, right? Well, not really. There are two significant problems, one to which Microsoft doesn't have a good answer, and another to which Microsoft seems blind.

The first problem is that of technological synergy. It's mind-boggling to imagine the Windows-IIS infrastructure of Microsoft meshing cleanly with the Linux-Apache infrastructure of Yahoo. I'm quite sure Microsoft isn't so keen on the idea of rewriting all of Yahoo's systems for Windows-based web servers... but they can't exactly be thrilled about the idea of maintaining millions of dollars worth of Linux-based systems, along with thousands of Linux-savvy developers. In all likelihood, the cost of dealing with this issue is grossly understated on Microsoft's offer letter to Yahoo. If you factor this cost in, Microsoft's premium stock price suddenly looks less attractive.

The second problem is cultural. Put simply, part of the reason people like Yahoo and Google is because they aren't Microsoft products. Microsoft's reputation is that of a purveyor of expensive, buggy, garish, and proprietary products that lock you into their hegemony. Yahoo and Google? In consumers' minds, they represent free, simple, easy-to-use products. I think it's fair to say that once Microsoft starts to put their own stamp on Yahoo products, a good number of people will look for alternatives.

The latter problem is the one that should be the most worrisome to Yahoo stockholders, because it's a problem that can't be solved with billions of dollars thrown at it. Microsoft is like a rich billionaire nerd: no matter how much money it spends, no matter how it tries to imitate its poorer but hipper rivals (*cough* Zune *cough*), it simply cannot buy coolness... at least, not without abandoning everything that makes it Microsoft.

My prediction? If Microsoft goes through with this merger, it will essentially destroy the Yahoo brand and its technologies. And that will only serve to accelerate Google's dominance over the Internet. Yahoo's board and shareholders will have to decide whether that's the price they want to pay to get out from Jerry Yang's bumbling leadership.

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