The Argument Against CEO Marissa Mayer's Alleged Plot To Go After Google And Facebook

Marissa MayerSoftware margins are compressing, you say?

Photo: jdlasica

Yahoo’s board hired Marissa Mayer to be its CEO because board members want the company to embrace a “products” strategy instead of the “media” strategy that interim CEO Ross Levinsohn would have gone with if he had gotten the full time job.A “products” strategy is one where Yahoo competes with the likes of Google and Facebook on the strength of software tools built for consumers.

What kind of software tools?

Google products include Google News, Gmail, Google Maps, and Google Docs. Facebook products include Events, Photos, and News Feed. Yahoo’s top products are email, Yahoo Finance, and Yahoo fantasy sports.

It’s obvious why this strategy is appealing to Yahoo’s board. All you have to do is look at the size of Google, a $200 billion company, and Facebook, a $65 billion company.

One reason they are so big (other than lots of growth) is because they have wonderful margins typical of the Internet software business, where raw materials and freight are cheap. Also, you can build Gmail once and then move most of the engineers who built it onto something else, leaving only a few behind to maintain and upgrade it.

Margins aren’t as lovely in the media business. If your business is to create content, you have a recurring cost the software business does not have; you have to pay people to create it over and over. If you depend on these people too much, they ask for too much money. Likewise, if your business is in the distribution of content, the people who make it will do their best to figure out, and then cut into your margins. (This is why Hulu and Spotify are longshot bets to take over the world.)

So, focusing on a “products” strategy seems like a smart, no-brainer, right?

Not so fast, says one long-time Yahoo-watcher we recently spoke to.

This person says that the conventional wisdom about the software business’s excellent margins, outlined above, is outdated and that Google is to blame.

He told us:

“12 years ago, engineering and helpful tools were such an incredible change in lifestyle so that if you were good at it, you could make a lot of money. Software was a crazy high margin business. But here’s what’s changed: Google and companies worth $100 billion and $200 billion have brought software innovation to a zero margin business. They don’t charge for software. They don’t charge for ad serving. They don’t charge for reporting. Google makes all their money on a monopolistic position in advertising. There are no software businesses anymore. The software business is dead. The people who are making their money there are doing it because Google hasn’t killed them yet.”

Translation: Google can afford to make software tools for consumers free to use because its search business makes so much money. Yahoo would be nuts to go out and try making a Yahoo Docs, Yahoo Maps, or Yahoo mobile operating system.

Hopefully, that’s not Mayer’s plan for Yahoo.

Hopefully, the plan is to bring “product” features to Yahoo’s powerful media brands, Yahoo Sports, Yahoo News, and Yahoo Finance. 

That’s our sneaking suspicion, which we elaborate on here >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.