What a Microsoft-Yahoo deal would mean for startups

The rumors of a pending Microsoft-Yahoo deal are out in the market again today (see NYPost and Techmeme).  Who knows if it will happen but rest assured if it did, Microsoft would be in a pretty good position to take on Google with Yahoo’s user and advertising base combined with Microsoft’s strength in development tools and aggressive strategy to go grassroots and emerge as the platform of choice to build next generation web sites and applications.  All that being said, let’s take a moment to think about what this would mean for entrepreneurs.

It is pretty clear what is happening in the market today – Google is dominating and the Internet advertising game is a game of scale.  The bigger you are the more opportunities you have to increase your lead – more users equals more data equals better targeting equals more money per click.  In addition with lots of inventory and excellent targeting, it is easier to attract more advertisers.  And as we all know, much of this whole Web 2.0 (yeah-I hate that term) world is based on advertising, advertising from Google AdSense and other partners.  Why not outsource your whole ad sales team as you can get a pretty good deal from Google without any operating expenses?  If you do the math, startups really do need a fair amount of traffic to merit hiring its own internal ad sales team.  Consequently, we have seen tons of web startups launch over the years as it is really cheap to build a web-based product and costs no upfront capital to start generating revenue. 

I am not sure about your own analysis but based on a number of portfolio companies, I can tell you that Google Adsense delivers the best results bar none in terms of generating revenue.  In a world without a combined Microsoft-Yahoo, it is pretty clear that Google will only get stronger leaving it with a virtual monopoly in the online ad game.  And as you know, monopolies over time take advantage of their position by changing pricing in their favor.  I am sure every company that is generating money from Google Adsense worries about the day when the revenue splits could change.  So on the positive side, a combined Microsoft-Yahoo would hopefully give startups another real alternative to Google Adsense as the combined entity would have real scale like Google and therefore the ability to deliver Google like results.  On the negative side, a combination would mean that there is one less aggressive acquirer on the market. So if the Internet ad game is one of scale, you can bet that in the future there will be a high likelihood of further consolidation. What this means is that entrepreneurs who are starting companies to be acquired better think twice as their chances of winning the lottery will diminish with time.  What this also means is that entrepreneurs need to start companies for the right reason and focus on building a real business versus the quick flip.