One of the regulatory hurdles a Yahoo (YHOO)-Microsoft (MSFT) deal will face is in the combined company’s dominance of communications (email, instant messaging, etc.). According to Kara Swisher:
- Yahoo has 256 million email users, while Microsoft has 255 million.
- Google’s (GOOG) Gmail is a distant third with about 92 million users and AOL (TWX)–which kind of started off the whole email craze among consumers–has about half that at 49 million.
- The same is true in the instant messaging market, with Microsoft and Yahoo holding an 80% to 90% per cent market share together.
Based on personal experience, these figures are surprising (we don’t know anyone who uses Microsoft or Yahoo instant messaging, for example, and given the number of folks we know who use AOL’s AIM, it seems inconceivable that it only has 10%-20% share, but whatever.)
But if these market-share figures are to be believed, Microsoft and Yahoo might indeed have to mollify regulators by spinning off a mail property. If so, this will eliminate one of the big reasons for the merger. (Kara says this issue is holding up the negotatiations, which is easy to believe). The combined company’s only hope of not gradually losing the whole Internet game to Google is to own dominant positions in various portions of it, such as communications. Also, a dominant web-based email platform would help Microsoft make the transition from desktop Outlook software to web-based corporate services.
According to Kara, however, Microsoft is already considering two options that could neutralize some of the value of the combination:
One solution is to spin off all the communications assets, said sources, into a separate company. In that case, the two brands would remain, so as not to inconvenience consumers, although all the back-end technologies to run the services would be merged.
The more drastic step is for Microsoft sell Hotmail to a third party, especially given that Yahoo! Mail is considered a stronger brand. Hotmail has already been in the midst of a transition, including a recent name change to Windows Live Hotmail.
Of these options, the first is preferable: Microsoft and Yahoo shareholders would still own the dominant communications provider, and a focused, stand-alone business like this might have a good chance of continuing to keep Google an also-ran. But this would also take the business in which the Yahoo-Microsoft combination will be strongest and spin it out of the company. And if you’re willing to entertain that possibility, why not just spin the whole Microsoft web business into a stand-alone Yahoo, which would be a better way to structure this combination?
The second solution, spinning off Hotmail, would still leave the more valuable mail assets–Outlook and Yahoo Mail–in the same entity. But losing the Hotmail subscriber base would weaken the company’s market position and would also leave a reasonably strong player as a competitor. Google or AOL would likely quickly merge with Hotmail (or all three would merge), which would reduce Microsoft-Yahoo’s mail position further. So spinning off Hotmail would seem to eliminate would major reason for the combination.
The best answer here, in our opinion, is still to spin Microsoft’s web businesses and $10-$15 billion of cash into Yahoo, with Microsoft owning a majority of the combined company. This still doesn’t appear to be under consideration.