Yeehah or Boohoo?

"Through this agreement with Yahoo, we will create more innovation in search, better value for advertisers, and real consumer choice in a market currently dominated by one company."

You have to pinch yourself that these were the words of Microsoft CEO, Steve Ballmer, as he finally welcomed a deal with struggling search and advertising company, Yahoo! It's a very different deal to the proposed acquisition last year which Yahoo rebuffed only to see their revenue, profits and share price plummet as their dependence on advertising margins got found out in a tougher market. Microsoft too have not found it easy, with sales slipping for the first time ever and redundancies announced earlier in the year as profits stalled.

It doesn't sound like the ideal marriage.

The words were also a little hypocritical as Microsoft still dominate the PC market for operating systems and office software, with similar market shares to Google's on search and advertising. The fact is that Google has innovated and sold superbly, leaving Microsoft and other rivals in its wake.

The new deal, sees Yahoo losing control of its search engine in return for 88% of all sales from search and advertising on its site for the first 5 years of the deal and it has have the right to sell adverts on some Microsoft sites. In the complex world of advert syndicating, impressions, click throughs and footfalls etc, this is seen as a mixed deal. Yahoo staff will almost certainly feel the knife over the next 2 years, having already been at the receiving end after falling profits, although some staff may transfer to Microsoft as part of the deal.

For Yahoo CEO, Carol Bartz, this is seen as landmark deal which could not have been done by someone like the founder, Jerry Yang, as there would have been too much emotional attachment to the search engine. The history of the on-off deals with Microsoft stems back to a rebuffed $47bn offer of cash and shares by the software giant. Later Yahoo struck a technology deal with rival Google which must have incensed Ballmer at Microsoft and sure enough anti-trust law stepped in to scotch the deal soon after. November last year saw Yang step down as boss and Bartz assume control and the ex-software executive, who masterminded Autodesk's extraordinary transition from high-end, cumbersome software behemoth to a fast-moving, almost consumer-orientated company, started to resurrect the deal. A lot of eyes were on Bartz as she is not known as a web-savvy operator but this deal marks something of a major coup for her as it is reckoned to be worth around $500m in incremental revenue and release about $200m in much needed savings.

In the hiatus, Microsoft launched a new search engine, called bing, which has had very little impact on Google and the usual tactics of embedding it as the preferred search engine in each new PC has not been done. Google still rules supreme here. The new deal, gives Microsoft about a 30% market share of the online ad market - the kind of figure not easily understood in a world where Microsoft usually is 70% of the market.

It is interesting psychology, but in the conference call to announce this tie-up, in 45 minutes not once did either CEO mention Google but the unseen enemy was indeed implied. Gagging in Ballmer's throat was the apparently positive thought of becoming a strong number two in the market.

In reality, this is a steamroller by Microsoft. Yahoo has lost control of its most prized asset in an attempt to rescue the company's fortunes. For Bartz, this would have been the equivalent of Autodesk giving Microsoft the rights to the software code of AutoCad - it's that bigger loss. In return, Yahoo gets to hang on to Microsoft's coat tails in an effort to compete with Google by dint of partnership and size rather than in technology. How Jerry Yang and the staff feel about this must be horrible, but then again, they were the ones who turned down $33 a share. Now the price is less than 50% of that.

For Bartz, this was perhaps her only option. But it is the equivalent of giving away the engine of a Ferrari in return for a larger share of the market - the Ferrari would never be the same again.

Rather than Google killing Yahoo, the latter has surrendered. For Microsoft, it will be interesting to see what they can do with a Ferrari engine inside a clapped out old Chevy.

Yahoo! - This Should Be Interesting

After a period when it seemed nothing could wrong for Yahoo! it did toward the end of 2008. It resulted in one of Silicon Valley's whizzier kids resigning and making way for an industry powerhouse, Carol Bartz. But can this software veteran turn around Yahoo!?

The End of The Yahoo! Era?

It seemed not much could go wrong for Yahoo! in the early 2000's. A steady stream of revenue announcements showed the company was growing along the lines everyone thought was the future - effectively an internet play that made its money on the marginal returns on advertising. It wasn't the only form of revenue but over time it became overly dependent. In 2008, when the global markets started to dive, this model was exposed. Yahoo! had to shed staff and suddenly Jerry Yang, once the brighest of CEO's in the Valley, was being ridiculed for his folly.

Enter Carol Bartz.

Autodesk - The Software Phenonemon

Having worked for Datech in the 90's, albeit setting up and running a specialist Videoconferencing Division within the company, I knew that Carol Bartz's name was already being revered. At one time Autodesk was a sleepy CAD company which had indeed brought design to the desktop and so had collapsed not only the price of CAD software but had also brought down the cost of running it. Soon CAD, which had always been associated with huge software costs and heavy computing power to run it, was running on Intel based PCs. It brought about a quantum shift in sales.

But under Bartz's control, Autodesk was not content with CAD only sales. Soon a whole raft of associated products hit the market that helped the company drive revenues from $300m to $1.5bn and become the fifth largest software company in the world and one of the most profitable at that.

Carol Bartz became widely respected for her hard-nosed and often uncompromising style which ensured Autodesk became one of the great success stories in software instead of being a niche also-ran. The company, situated in the picturesque Bay town of Sausalito, had a great view of the rat race of Silicon Vallay over the Golden Gate Bridge and South of the majestic City of San Francisco across the water. It remained quietly apart from the often incestuous and inbred feeling the Valley has and maybe that was a part of it's success.

Whichever way you cut it, Carol Bartz presided over a dramatic growth in sales at Autodesk and is rightly credited for her tenure there. Now she sits on the Board of prestiguous companies like Cisco, NetApp and Intel. Her resume is very powerful indeed.

The Web

There is one thing that is missing in Carol Bartz's superb success story - she has little or no exposure to the web. Autodesk was essentially an off-the-shelf software in a box company which leveraged a great deal of after sale revenue on complimentary products and services like training or maintenance. It had a very traditional feel to the sales effort and while at Datech we often talked in terms of 'How many CADs had been sold' which referred to licences shipped.

Yahoo! is very, very different. It is a 100% web 'pure play'. Classic Web 1.0, Yahoo! grew through giving away software and services to a vast web community that lapped up its email and directory services amongst other things. Now there is messenging, video calls, communities, blogs, websites and much more. The sorts of things Carol Bartz will not find are boxes of software, lots of juicy, high margin services and no third party Distribution companies to woo.

Growth or Turnaround?

Some still think Yahoo!'s current predicament is one of lacking growth - a minor blip in the upward trend that the web offers clever companies. However, there is more of a concensus that Yahoo!'s model has been the issue and that continuing in the same way will not be the right thing. Critics of Bartz, and there are a few, say that she is a CEO who is fine managing an upward trend or even an 'even keel' as Rob Enderle of The Enderle Group describes her. For him, growing a company fivefold is actually just manning the tiller. But he does have a point - Yahoo! is not just an entirely different company, it is a serious turnaround situation.

Very different from Autodesk, which was entirely in control of its operating margin by adjusting the price of its product and production, Yahoo! is a marginal player entirely dependent on the supply and demand of online advertising - and that is up the creek at the moment. Supply and demand means that pricing and margins are much more sensitive and you cannot easily change the operating costs by sacking programmers, it means wholesale redundancies as there is little Intellectual Property (IP) that Yahoo! gains revenue for - and that's the nub of the problem.

Freebie Business Models

Perhaps this was an obvious outcome of a freebie business model and we have seen the last of these. I am not so sure. I think Yahoo! went far too far down the path of earning from marginal sales and did not get some core technology it could obtain revenue from as Google has done. The giants of this space have all got a crown jewel, a black box of core technology that has to be paid for - Yahoo! bypassed that and went for an advertising biased model for which it has paid a big price.

Will Bartz Succeed?

It's a huge ask, that's for sure. It's new territory for Carol Bartz - as head of Autodesk, and even on the Board of such companies like Intel and Cisco, she has always been associated with businesses with traditional models and IP, which can shore up its profits by flexing its pricing model because it owns the technology. Not so Yahoo! - it's a different ball game.

The jury is out, but as someone who saw at first hand the company she transformed, I think the lady who shook the masculaine status quo and became one of the first female CEOs of a software giant has a great deal more up her sleeve than most think. I think she may just prove the sceptics wrong (no rhyming slang intended).