Microsoft-Yahoo!: reasoning by analogy

What does the future of Microsoft's $44.6 billion offer for Yahoo! look like? To me, a Microsoft-Yahoo! deal looks most like Time Warner's merger with America Online -- it also involved two giant companies, a huge amount of money and a lot of CEOspeak about "market opportunities" and "synergy." And the result? Two words: not good. After taking the biggest write-down in American corporate history, Time Warner is worth a fifth of its capitalization before the 2000 deal and it's new CEO's Job Number One is to unload AOL -- reportedly he's hoping to get just over 10 percent of what Time Warner paid eight years ago. I realize that I'm reasoning by analogy here, and there are plenty of differences between the situations of Time Warner/AOL and Microsoft/Yahoo!. But there are enough similarities to raise red flags about this deal's potential for success.

• In 2000, Time Warner, like Microsoft today, was a giant in its industry that couldn't get a foothold on the Internet, and like Microsoft, the reason was at least partially that it couldn't bring itself to offer content that was profitable in other media for free on the Web – think MS Office.
• Gerald Levin, Time Warner's CEO, made a deal with Steve Case, founder and CEO of AOL, for $160 billion. Case became executive chairman of the combined companies, called AOL Time Warner, working with Ted Turner, the combined companies' largest stockholder who moved aside for him, and Levin, who remained as CEO. The infighting that resulted reached from Case-vs.-Turner on down to the old Time Inc. managers who battled with AOL newbies. (It's chronicled in a great book, Bamboozled at the Revolution: How Big Media Lost Billions in the Battle for the Internet," by John Motavalli.) Think Ballmer-vs.-Yang.
• The Internet bubble burst, and in the perfect storm that followed AOL Time Warner's stock price fell 70 percent in two years. The company took a $99 billion write-down. Turner's fortune was, if not exactly drained, substantially reduced – at one point his stock holdings were down $9 billion. Think the Bill and Melinda Gates Foundation endowment.
• While billions and billions of dollars were lost in that attempt to move an old-line company into a new-technology line of business, the irony was – and continues to be – that the old lines of business remain profitable, while the it's the new-technology venture that is underperforming. Think MSN/Windows Live.

Whether you're a Microsoft stockholder or a Microsoft customer, which would you rather see it spend $44 billion on -- Yahoo! or its core businesses? The mythology that says Microsoft keeps trying until it gets it right doesn't square with the elephant's graveyard of products that didn't make it, from Microsoft Money back to Access terminal software. If the company hadn't been distracted by losses in the gaming and online divisions would Vista have arrived two years earlier? And how different would Microsoft's fortunes be today if that had happened? Microsoft knows exactly what it needs to do to win in the online marketplace. It has to do what Google and Yahoo! do – compete as hard as it can with Microsoft. But really competing, offering online products and services that increase the value of the Web and diminish the value of the desktop, would not only take dollars away from Windows and Office directly, but create an opening for other OSes and Web-based service providers on a more level playing field. And that is exactly what Microsoft can't bring itself to do. Even if a deal can be done with Yahoo! (which isn't a foregone conclusion), spending $44.6 billion won't substitute for the willpower to do what's necessary.