I wanted to comment on the Microsoft-Yahoo deal (where Microsoft will now handle Yahoo’s searches).  But I thought I’d do it through the lens of a post by Jason Calacanis because I think he holds an opinion that many share.  The opinion that Yahoo made a bad deal.  I disagree with that and I want to tell you why.

Here’s the first quote…

Google and a lack of faith in one’s ability to compete in the space they created. To be clear, Yahoo didn’t need to do this deal,  Microsoft did. Ultimately Yahoo will look back at this moment as the second–and perhaps fatal–mistake in their epic history.

Yahoo is not a technology company.  They always made their money off  the use of relatively simple technology in partnership with their massive brand recognition.  So they really didn’t create the current search market in that their search was a pretty basic text search (which pales in comparison to the advanced and secretive algorithms being used today)

In my experience the people and businesses in this world that are successful are ones that realize what they can’t do.  Because that allows them to use all their resources doing what they do well instead of wasting time on what they don’t. 

Search is the most important business of the 21st century and owning a  commanding lead in second place is not insignificant.

Well…Yahoo’s held that position for…a while now.  If they were going to manage a significant profit off it I’d think they would have done it by now.  Eventually you have to cut your losses.

As for the deal, on the merits Yahoo struck a financially profitable deal since they’ll get 88% of the revenue from Search and even the most basic analysis tells you they were spending more than 12% of their revenue on simply maintaining the hardware used to run a massive search engine.

To say it clearly: Microsoft does not enter a market unless it’s  important, huge and on the way to becoming even bigger. Microsoft is the buy sign, not the sell sign. The people at Microsoft are brilliant and not to be underestimated–history has shown this to be true.

I certainly wouldn’t be using Microsoft as my compass at this point.  Especially at a time when they’re busy packing up a bunch of businesses that never took off.  Even in it’s heyday Microsoft was more a “bet on every horse” company than a “pick the winner” one. 

Ask all the people who bought a TabletPC (or its predecessor Windows for Pen Computing)

At this point I’m going to jump way ahead to what Mr. Calacanis thinks is “the lesson” here. 

The lesson for all startups–and BDC’s (big dumb companies)–is that innovation is all you have. Once you stop innovating you lose your talent and you lose the race. Never. Stop. Innovating. Never. Never. Never.

This seems like an obvious lesson but when you really think about it you see it isn’t great advice.  Technology is a hard business because you have to constantly innovate.  Companies like Microsoft have spent decades working out a methodology and corporate culture that will allow them to produce great technology.

Yahoo, as I said above, was never a technology company.  From the start their technology has been fairly straight forward.  If anything, trying to innovate as a technology company has been their real downfall. 

How many Yahoo acquisitions have failed because the acquired company became part of Yahoo and learned they couldn’t function under the corporate structure?

The lesson here, as far as I can see, is when you find yourself in trouble as a company you should step back and ask yourself “what are we good at?”  Yahoo didn’t do that.  They went off trying to do what Google was good at and got their head handed to them. 

Yahoo had/has a great brand and what they are good at is being an aggregator.  Had they realized that they could have stopped pouring good money after bad with their search engine (which was never going to beat Google) and focused on their more promising aggregation acquisitions (flickr for example). 

Not every company has to be a technology innovator to make money. 

History with Jason Calacanis

This last part is a complete aside. 

I think I’ve come to the point where people mis-representing IT history is a pet peeve for me.  I grew up reading trade magazines, books, etc… on the tech industry and it really bothers me that “A-Listers” have such a weak grasp of their industry’s history. 

On that note I wanted to address a few unrelated quotes from the article.  The first quote is regarding Yahoo’s deal with Google in the early 2000s (Where Google had essentially the same deal Microsoft is striking now)

Had Yahoo  not given their search franchise over to Google back then, there is a good chance that the race for the most important business of the 21st  century would be a dead heat. Certainly it would be closer.

Historically that simply isn’t true.  Yahoo wasn’t what we now consider a search engine before Google came along.  It was more of a directory listing with a really lousy text search tacked on.  When Google took over Yahoo’s search business they were already losing share to Alta Vista for just that reason.   So if the logic above is right wouldn’t Alta Vista still be in competition?

In truth the pagerank innovation was a game changer that no one was ready for and that is what killed off the search competition.  

When Microsoft is  interested in a space it is a clear sign that you should be investing in it–not selling it.

Microsoft’s deep dive into a graphical user interface on an operating  system, Windows, was a clear sign to Steve Jobs that his bet was correct. Steve doubled and tripled down and that is why Apple is  Apple. Microsoft’s deep dive into word processors and spreadsheets was the clear sign to WordPerfect and Lotus 1-2-3 that this was a space worth fighting for.

I’ve been over this little piece of history before but it’s worth a repeat.  Microsoft didn’t dive into Windows based on Apple.  In fact, as has been documented in several books on the topic Gates was obsessed with the Mac but still felt the IBM/Microsoft joint venture OS/2 would rule the business world (because IBM always had).

Windows didn’t become a focus for Microsoft until version 3.1 in 1992.  Almost a decade (8 years and 2 months) after the Mac debuted.  Incidentally, 1992 was also 7 years after Steve Jobs had left Apple.

(For the record Windows 3.1 became a focus because of the success of Windows 3.0 which was released in May 1990.  But it’s success was a slow build so the realization by Microsoft really happened over a period spanning the last part of 1990 and the first part of 1991)