The once proud warrior of the internet space laid down its sword,  knelt at the feet of Microsoft and gutted itself today. There was no honor in this death, it was one brought by the shame of losing to  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.

Search is the most important business of the 21st century and owning a  commanding lead in second place is not insignificant. At one time Yahoo was the number one search engine and portal. However, they  didn’t see the value in search and decided to syndicate that piece of their business to a small company called Google. For a couple of years  we all experienced Google in Yahoo’s wrapper. Our only indication of who made this wonderful tool was a tiny “Powered by Google” logo on the top right of the page.

We noticed and we learned. The thought leaders went directly to Google  and dragged everyone but the laggards (Yahoo’s current 20% market share) with us. Yahoo accelerated the ascent of the master. 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.

Today, with their Microsoft deal, Yahoo again undervalues their search asset. Again, they will be “Powered by…” and again they will destroy their brand and its value.

All that being said, Microsoft’s obsession with taking Yahoo’s second  place position and adding it to their 3rd place position is not an indication that it’s time to sell. Far from it. 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.

Microsoft’s massive investment into video games, mobile operating  systems and search are clear indications that Sony’s Playstation, Google’s Andriod, the iPhone, Google and Yahoo are very important companies.

Nintendo didn’t give up when Microsoft came into the video game  space–they innovated. Now the Wii outsells the mighty XBOX 50 million to 30 million. That is how you fight Microsoft: you innovate. Steve Jobs knows this, Nintendo knows this, and Oracle knows this. Yahoo, apparently, did not get the 40-year-old memo.

Aggression and innovation wins. Period.

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.

The Right Move
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The proper move when someone wants something you own badly is to  invest more in it. “Oh, you like my house and you’re willing to pay double what I paid for it? Did I mention I just redid the kitchen, bought the lot next door and put in a newHVAC system?” How much is it worth to you now? That’s gangster CEO-level poker playing. You raise and raise while you develop your hand and increase its value.

If I was the CEO of Yahoo I would have bought Powerset and five other  innovative search-related startups in the past three years, taken bold steps to innovate in search design and spent $100m in marketing the service.

Oh wait, that’s exactly what Microsoft did! Zing! Pow!

What did Yahoo do instead? While playing tough guy with Microsoft’s  war chest of money, debating $31 or $33 a share, they took their eyes off the prize and stopped innovating. The founders ofFlickr and  Delicious left, Yahoo’s once promising think tank was shut down, the products didn’t advance and all the cool kids left. What a disaster.

While Rome was burning in Sunnyvale what did Microsoft do? The opposite: they invested in search, hired the cool kids and gave Yahoo, their shareholders and the public one very clear message: Yahoo is dying on the vine, incompetent and we’re solving the problem. You can sell to us or get run over by us. What did Yahoo do? They took a page out ofTimeWarner/AOL’s handbook and brought in someone who had never worked in the consumer internet before to clean up the mess.

[ Note: I've never met Carol Bartz so I can't speak to her abilities. Clearly she is a very competent deal maker and operator. However, she's not in the league of the growing "product genius" Google cabal of Larry, Sergey,Marissa, Chad and Salar. ]

Yahoo’s shareholders should be in full revolt right now, but the truth  is the shareholders of Yahoo lost faith long ago. From the Yahoo  shareholders I’ve talked to over the last couple of years–and I’ve met the big institutional ones who own large chunks of it–they want to get the best possible price out of Microsoft and move on. They were  tired of the war and thought gutting the pig and selling the pork was better than building a farm. Well, maybe that isn’t the best analogy in the world, but I think you get my point: cut it up and ship it out. We’re done here.

Round Three
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And so ends the second chapter of search and begins the third.

Chapter one was inception up until the launch of Google.

Chapter two was Google’s rise and Yahoo’s death.

Chapter three will be the two-horse race of Microsoft and Google, with the inevitable emergence of a third and fourth player.

That’s the silver lining for startups in all of this. As Google and Microsoft lock into a dog fight for revenue and market share, leaving the Yahoo carcass on the side of the road, the bevy of crafty startups will get their chance to take the third, fourth and fifth positions in this very important race.

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.

Man I love this game.

Question: Who got the best of this deal and why? (replies are considered ok for reposting unless you say “not for republication” or “ok to republish, just don’t attribute to me”).

All the best,

Jason@Mahalo.com

Original article here.

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