Yahoo’s Dilemma: Choosing the Right Partner for Microsoft Face-Off

Last week continued the excitement with Yahoo as it worked to get Microsoft to increase its offer by trying out alternatives but not really finding any good ones.

At the huge phone conference in Spain — where Apple wasn’t — companies from Microsoft to Google announced acquisitions and plans that seem to focus on taking on the iPhone. Finally, we are now within weeks of the first hybrid laptop and desktop PCs, and it is time to chat about those.

We’ll talk about that and close with my product of the week, which is possibly the next eBay. It’s a site called “iRent2U,” which possibly does for rentals what eBay did for outright sales.

Yahoo: In Search of a Plan to Stay Independent

You have to feel for Yahoo — well, sort of. It just got an unsolicited offer to buy the company for 60 percent more than stockholders thought the company was worth at the time. The board evidently would like something closer to 90 percent, and it certainly is nice to have dreams. The problem is that Yahoo had no bargaining position, as it knew that if Microsoft backed out of the deal, Yahoo’s stock was likely to fall by half. If that happened, the stockholders would likely go after the board and executive staff with pitchforks.

Initially Yahoo floated the idea of buying AOL, which would make it larger. However, given that AOL is performing worse than Yahoo, the end result of the acquisition would likely be an even more dramatic reduction in the company’s valuation. This likely would only increase the number of shareholders carrying the pitchforks and actually result in Microsoft reducing its offer, or just walking away altogether.

The latest plan seems to be to exchange partial ownership of the company for control over MySpace. On the one hand, this would put Yahoo back into a market (social networking) it should have owned. On the other, however, MySpace is falling off against the more popular Facebook, and News Corp. is probably less than happy with it. It’s a better plan than AOL by far, and the result could allow Yahoo to hold off Microsoft, but it would still crater the stock price if it forced Microsoft out.

Though this is more likely to result in Microsoft raising its bid than an AOL deal would, it still doesn’t provide a great deal of balance given how far over the market valuation Microsoft initially bid and the fact that Yahoo’s outlook wasn’t — and isn’t — particularly good.

The risk is this: Microsoft walks, the Yahoo shareholders probably revolt, and the new board sells for something less than what Microsoft last bid, which already is lower than what it offered a number of months back when Yahoo was in better shape. However, if Yahoo were to take this bid, its board would still likely face some stockholders who clearly believe they should be able to get more. I don’t envy the Yahoo board at all as, right now, they appear to be in a lose-lose situation.

If Microsoft wants to close this deal, it will need to find a way for the Yahoo board to win without Microsoft looking like it significantly overpaid. Come to think of it, I don’t envy Microsoft in this right now either.

I believe there is still more chance this deal will happen than not, but the probability of it happening at a lower price, or not happening, appears to be going up sharply while the probability of it happening at a higher price has only slightly increased. It seems very unlikely now that it will happen at the current bid price, since the value of Yahoo is still trending down over time.

The World Against the iPhone

In Barcelona, Spain, there were a raft of announcements putting the iPhone at risk and clearly indicating that the market is taking the Apple product very seriously now. The now-announced Google phone looks a lot like an improved T-Mobile Dash, which was both based on Microsoft’s technology and one of the best phones ever created using the Microsoft platform.

Sony/Ericsson announced its new smartphone and also its first based on Microsoft technology. Sony has historically been seen as the closest PC manufacturer to Apple in terms of design. Microsoft bought Danger, which with 1.2 million users, had the dominant consumer smartphone before the iPhone and Apple did to it what the iPod did to Creative Labs. Danger’s Sidekick has what is arguably the best non-Apple smartphone user experience.

All of these products do a better job than Apple with regard to anything having to do with text. None of the products are as cool as the iPhone yet, but all should be vastly less expensive and be available on more carriers. Google’s phone may provide a better online experience and better YouTube support, and the Microsoft products continue to provide better corporate connectivity. However, Apple is expected to announce ActiveSync support shortly, which will close that gap.

Now, by the time most of these phones come out, or in the case of Danger, the Microsoft version is released, Apple will have refreshed its own line and, at the very least, will have improved the bandwidth. The question then becomes will the device improve its text performance and better address its battery and cost disadvantages?

The move to 3G will either reduce battery life or increase the size of the phone (along with the battery) because it pulls more power. If a keyboard is added, this too will make the phone much thicker and less attractive. Apple is one of the few firms capable of designing its way out of this, but it won’t be easy. That isn’t a problem for Apple, however, because it did the iPhone and it was near impossible.

This is a long way toward saying that competition is stepping up sharply in the iPhone space. You are now much more likely to have more options by year end. Choosing the best one will increasingly be a more difficult task.

The Hybrid PC

In a few weeks you will see the hybrid laptops and desktops hit the market. This may be one of the reasons why the new Apple laptops, which were expected at MacWorld, are delayed. A hybrid PC has both an integrated graphics processor and one or more discrete graphics processors or cards. The advantage will be a combination of better graphics performance and lower power use or — in the case of a laptop — better battery life.

If you don’t really need much graphics performance, you’ll likely not care much, but if you do, it will make high-performance laptops (which today are basically portable desktops that have battery life measured in minutes) viable. They’ll also potentially reduce your electricity bill dramatically, suggesting you can better justify buying a new one because you are cutting costs and doing something “green.”

How these work is they use all of the graphics processors when in high performance mode (when you are doing something like photo editing or gaming) and only use the vastly more power efficient integrated graphics chip when you are working in Office or playing your screen saver. This is just a heads-up — we’ll talk more about this when the products actually launch.

Product of the week: iRent2U

eBay transformed garage sales into Internet events and created a massive number of cottage businesses. However, eBay is based on the idea of buying something, and a lot of us lease or rent things we can’t otherwise afford. iRent2U is a new service that was created by a bunch of smart university students and then transformed into a very real product in the same way everything from Netscape to Google came about.

It is in its infancy and, as yet, doesn’t have the following that eBay has by a long shot. But it fills a niche; it has the feel of an eBay-like offering in that it fills a need that currently is not being well met. Like other online properties it will likely mature a lot over the next few months and, initially, doesn’t have a lot of things to choose from. But finding something like an early eBay, I think, is really interesting, and that is why iRent2U is my product of the week.