Ballmer Batting Eyelashes at Yahoo!

Microsoft CEO Steve Ballmer kept hopes of Yacrosoft alive today with this announcement at a conference on the East Coast:

"We offered $33 bucks (for Yahoo) and it's $11 today," Ballmer said. "It's clear Yahoo! didn't want to sell. They probably still think it's worth more than $33 a share. I still think it makes sense for their shareholders and ours."

Then, later in the day a Microsoft spokesman said this:

"Our position hasn't changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies."

It appears that for the moment the Yacrosoft buzz is coming from Steve Ballmer, but has yet to materialize in any substantive negotiations. Still, this could signal the beginning of negotiations for Yahoo!'s depressed stock. The following questions remain:

• Will Yahoo! even sell to Microsoft?
• Will Yahoo! continue to set unrealistic expectations for its share price?
• Will a merger between Microsoft and Yahoo! foster greater competition in the paid search market?
• Will Microsoft be incorporate Yahoo!'s service with its own web offering without causing major damage to both brands in the process?

I raise this last question because it's unclear to what extent Yahoo! and Microsoft--when put together--create synergies. First of all, many of their offerings overlap, which creates the problem of brand confusion and/or user cannibalization. Also, one of Yahoo!'s greatest intangible assets is its newly found image as the high-profile underdog in the web space. By becoming a part of Microsoft, Yahoo! will not only continue to languish behind Google in the onlin ad space, but it will at the same time be associated with Microsoft, a company for which very few internet users will have sympathy in its current struggle. In fact, the response from the tech company will go in the opposite direction. There will be a considerable flight from Yahoo!'s services under a Microsoft regime.

I have nothing against Microsoft. I think they do a fair job at creating software solutions for the masses--which is by no means an easy task. However, one must realize that the company's image does not fit with Yahoo!'s, and that if Microsoft's image is not harmed by a Yahoo! acquisiton, Yahoo!'s certainly will be.

Perhaps that's the point. As others had point out this spring when a deal looked very likely, maybe Microsoft was toying around with Yahoo! in the hopes of destroying it and taking over a good chunk of its position in search. While I don't think this is the case, the end result might be the same. (However, it's no foregone conclusion that a world without Yahoo! would make Microsoft a lot more powerful in the search market.) While Microsoft is still entertaining the idea of a deal, perhaps Yahoo! will take its eye off the ball and fail to formulate a real long-term strategy to maintain relevant in the online space. With the distraction of Microsoft, as well as huge hits to the ad market, it will be interesting to see how Yahoo! comes out of the current economic funk. On this front I don't have any good predictions, but short of a generous purchase by Microsoft, nothing will come easily.

Web Entrepreneurs Beware

My friend Kavi Turnbull, co-founder of DriveAlternatives.com, just alerted me to an article on TechCrunch that highlights an e-mail from one of the Valley's most prolific angel investors, Ron Conway, to his portfolio companies.

The e-mail was ridden with advice for entrepreneurs facing a grim market outlook. Among this advice was the strong suggestion to decrease your burn rate to make your cash last an extra 3-6 months. Unfortunately, for many entrepreneurs this can only come about by firing staff.

Also, if you're in a funding stage, raise money--and as much money as possible--as soon as possible. Time is running out before private equity money is all dried up, especially the ever-important venture capital. Also, expect an unfavorable valuation. To get your necessary capital, you will probably have to give up more equity than your normally would. Times are tough, but your business still needs to survive.

Look for corporate partners for funding, and perhaps an all-out sale. According to Dan Howell of Mesirow Financial, who spoke to our class this week, the private equity market is soft and the leveraged buyout market is much weaker. (The overall market could still be good for his firm, as there could be many deals to be had for the next few years for equity buyers.) However, there are large tech companies out there with the ability to make cash purchases. Last time I checked, Apple had about $20 billion in the bank and Google had about $15 billion. Other heavy hitters with cash include HP, Microsoft, and EMC. In this market cash is king. Stock prices are depressed to such an extent that stock-based purchases aren't a viable option.

Notwithstanding this sound advice, the fact of the matter is that times are tough and many promising start-ups will find their hopes dashed by a weak equity market and a frozen-solid debt market. However, those companies that are lucky enough to have a full war chest can economize in the short- to mid-term and save some time before running out of cash or--better yet--before the economy turns around.

Smartphones: Making the World More Googley

It seems like everyone has something to say about smartphones these days--and everyone seems to have their favorite horse. Some think RIM's Blackberry, the incumbent stalwart, will continue its success. Some think Nokia's Symbian OS will gain ground. Then again, who would count out Apple? The iPhone has seen great adoption in the consumer market, essentially expanding the overall smartphone market.

But this is just the beginning.

Similar to Apple's effect of expanding the smartphone horizons, Google will soon come to the scene with its first Android-based phone, available through T-Mobile. The wireless provider has recently tripled production of the G1 based on huge demand for pre-ordered phones.

Rather than being a Blackberry killer, or any existential threat to any other players in the field, Android could be a boon for the smartphone market. With both Apple and Google in the space now, the two most powerful brands in the world will get their weight behind a new revolution in wireless computing. People who have never bought a smartphone (guilty as charged) will now become interested in upgrading, if they haven't already.

Although I've only seen a demo of the G1, the slide-out qwerty keyboard and what I assume to be great compatibility with various Google apps are enough to get people excited about using the internet on a phone.

So, who stands to benefit? Well, perhaps all of the companies aforementioned, if the total pie suddenly becomes a lot larger. However, Google is the one company that seems to win out no matter which handset maker, or no matter which mobile OS, ends up winning the lion's share of the market.

Why is this, you may ask?

First and foremost, Google wants people to use mobile search. According to Nielsen Mobile, Google already dominates the mobile search market with 61% of the searches, a stranglehold only slightly eclipsed by the company's dominance on the desktop. Since the number of searches executed by smartphone users is staggering compared to those of more conventional cell phones (yes, people like me still use those) Google would do well to make sure that as many people as possible have smartphones in their hands.

But doesn't the mobile search trend cannibalize Google's desktop-based revenue stream? Well, maybe, but who cares. Google will be happy to expand its search horizons to mobile search. Geo-targeting, something that Google has tried to do on the desktop with limited success, has its holy grail in smartphones. If Google can offer up relevant advice based on where you are anywhere in the US, you will likely make many of your commercial decisions through its search service.

I could make up plenty of compelling scenarios to sell extreme relevance and potential profitability of mobile search, but I'll leave that to your imagination. Very quickly you'll realize that it requires very little creativity.

So, Google's entrance into the smartphone market will add even more excitement to one of the best growth frontiers in tech. In my opinion, there will be plenty of opportunity for RIM, Nokia, Apple, and others as well, but Google stands to gain the most from smartphone penetration. Certainly, Google would love for Android to become the standard, but it's really not necessary for the search giant to gain from smartphone use. If Symbian wins out, or if Windows Mobile gains more ground, Google still wins.

Now, if only the greater world economy would cooperate we might see some actual gains in share prices...anyone's shares...please!