A Microsoft-Yahoo! Deal User's Guide

By Lev Grossman

Don't panic. Above all, remain calm. Or if you are already calm--in fact, I see a few of you dozing in the back row there--then wake up! An enormous convulsion is taking place in the Internet economy. Microsoft, the world's largest software company, wants to buy Yahoo!, which is (in its own words) "the world's largest global online network of integrated services," whatever that means, for $44.6 billion. Yahoo! is resisting. It's a complex, many-sided deal with repercussions in all directions. What does it mean for you? How will the world be different? Will your oxygen mask deploy in case of emergency? This guide will answer those questions and more. But the answers aren't simple, and they all depend on where you're sitting.

If You're a Google Employee

Your world is changing, friendo. Separately, Microsoft and Yahoo! are the second and third most trafficked properties on the Web. Together, they will be the first. (Guess who will be the new No. 2? That would be you.) Separately, Microsoft and Yahoo! have two not-bad search engines, two so-so consumer brands and two all-right online-advertising systems. Together, they will still have all those things, plus the added nightmare of integrating them. Separately, Yahoo! and Microsoft are Goliaths. Together, they will be ... an even bigger Goliath. O.K., maybe your world won't change that much.

This is a deal about brute scale, about huge numbers. For example, if you squish Hotmail (Microsoft's e-mail service) and Yahoo! Mail together, they have 426 million users worldwide; that's compared with Gmail's paltry 90 million. But don't let those huge numbers distract you from two very small ones. First, the number 1: that's where Google stands in the search business and in the online-advertising business, the latter of which--unlike search or e-mail or instant messaging--actually has real dollars attached to it. Second, the number 0. That's how many new ideas Microsoft will be acquiring by buying Yahoo! The two companies run their Web businesses very similarly and not very well.

So relax. Ride your little electric scooters, and eat your free salmon carpaccio. You and your $500 stock are fine, probably. The only scary thing is, Microsoft has a history of trying to turn big numbers into industry dominance even when it doesn't have lots of good ideas. It's done this in software through its near monopolies in operating systems and Web browsers. If Microsoft eats Yahoo!, it will also have dominance in Web-based e-mail, instant messaging and Web portals. That's got to be a temptation. Sure, Google is "the No. 1 search player," a source close to Google argues. "But users can click away and use another search engine. Microsoft has monopolies. Governments on both sides of the Atlantic have found that it abused those monopolies." Will Microsoft bully the Web the way it bullied the PC?

Maybe. But the Internet doesn't work the way the software business works. Yes, it runs on computers, but the Internet is part of the media now, where choice rules. Says Daniel Taylor, a senior analyst with the Yankee Group: "In the technology business, they say you've always got to choose between us and them, between our technology and theirs. That's what Microsoft has done. Yahoo! is a really good property for them, but I don't think they are going to be able to pull it off."

So no worries after all.

If You're a Microsoft Employee

It's funny, isn't it? Google is calling you a dangerous, monopolistic monster who will crush openness and innovation on the Internet. You are saying the same thing about Google. Don't fight, fellas; you're both right! Google is massively dominant in the ad-serving market, and with Yahoo! under its belt, Microsoft would run both of the biggest Web portals around. There are no underdogs to root for. There's room for everybody to be a little evil here.

So if the merger goes through, Microsoft will have the size to compete with Google in the online-advertising game, a fast-growing sector with a ton of potential. Size means greater efficiency and more inventory to offer advertisers. "The No. 1 thing we're trying to do is increase scale and increase capacity to give ourselves a better chance to be more successful more quickly," Microsoft CEO Steve Ballmer told analysts on Monday. "It's not primarily about scaling down. It's about scaling up."

Bigger had better be better, given the $44.6 billion price tag on Yahoo! That's massive in terms of both its stock price and the amount of money Yahoo! is expected to generate. The worse news is, you're not very good at the online-advertising game and you aren't buying anybody who is. Google figured out how to make more money per ad sale, on its own site and others, than either Microsoft or Yahoo! Online advertising is about size and smarts, and you've got only one. Google has both.

And there will be a lot of new faces in the cafeteria now, about 14,000 of them, and you've promised $1 billion in cost savings. Something's got to give, which brings us to ...

If You're a Yahoo! Employee

Isn't it romantic? Your prince has come to save you! He's a bit balder than you had hoped, but it's time to lower your expectations. Your executives are bolting, and you just puked up a hair ball of an earnings report.

Sure, Yahoo! is practically a historic landmark, the last of the pure dotcom plays from the wild 1990s. But brace for impact: Microsoft hasn't even promised to keep the Yahoo! brand alive. ("That's a question we haven't answered yet," purrs Yusuf Mehdi, Microsoft's senior vice president of strategic partnerships. Really?)

But don't put your resume up on Yahoo! HotJobs just yet. There's a war for talent in Silicon Valley, and Microsoft is bleeding troops to Google (which is bleeding troops to Facebook). Microsoft needs you. Just keep muttering something about cloud computing. That's hot right now.

If You Advertise on The Internet

The you win! At least the way Microsoft spins it, which is that a combined, more muscular Microsoft and Yahoo! makes a more credible challenge to Google, which helps advertisers, even though there would be two space sellers instead of three. Rob Norman, CEO of WPP's GroupM Interaction, the world's largest media buyer, is cautiously optimistic. "It's a qualified good," he says, "because in an auction atmosphere, you're competing against other advertisers more than the auctioneer itself. The deal won't give you leverage against Google, but it could give you choice, and more choice is always positive."

But you're already a winner, since you're a buyer in a market where supply greatly outstrips demand. Seriously, if Microsoft's $44.6 billion bid for Yahoo! means one thing, it's that advertising--not subscriptions or surveys or micropayments--is the engine that Internet content will run on. This is a victory party for online advertising's long boom. According to a Yankee Group report, online advertising rang up $16.9 billion in revenue in 2006 and could grow 24% a year or more. It's still a pretty meager slice of total ad spending--only 7.5% last year, according to the report. But expect that to change. "An industry that was pretty much left for dead five years ago is right back beyond where it was in the peak of what we now call the bubble days," says Andrew Frank, media-research vice president at Gartner. "People in the moment tend to lose the perspective on that."

If You're the Average Web User

You always get forgotten in all the excitement, don't you? Well, you probably won't see any noticeable changes for a while. Eventually--this could take years--MSN and Yahoo! will merge, Live Search and Yahoo! Search will merge, Hotmail and Yahoo! Mail will merge, and so will the two instant-messaging services. You'll see some minor technical glitches along the way.

That's the obvious stuff. Now for the subtle stuff. As Google and Microsoft get more competitive over ads, you'll see new kinds of ads, and in new places, like on your cell phone. Your traffic will become more valuable, and you'll see, if you look carefully, underhanded ploys to secure it. Microsoft has pinned a lot of its hopes for future growth on this business. The risk with a huge, diversified entity like the merged Microsoft-Yahoo! is that it would get up to dirty tricks like diverting Web surfers to its own pages rather than to the most relevant search results. That would subvert the Web's promise and your power to choose. Don't let them do it.

You have the power. If advertising is the engine that Internet content runs on, your attention is what fuels that engine. As big as this deal is, it's really just you that everybody's fighting over.

With reporting by Kathleen Kingsbury, Kate Stinchfield