Google, Microsoft, Yahoo as Ford, GM, and Chrysler

This was originally posted at ZDNet's Between the Lines.

Could Google, Microsoft, and Yahoo be the equivalent of Ford, GM, and Chrysler decades ago?

That thought-provoking question was raised by Bernstein analyst Jeffrey Lindsay, who cooks up weekend missives designed to make you go hmm. The argument is an interesting one. Lindsay notes that the downturn of 2001 to 2003 in Web advertising--AOL imploded and Yahoo fumbled--allowed Google to emerge. Instead of getting bought, the future search giant went public and owned the sector.

Fast-forward a bit and MySpace, YouTube, and Facebook had no shot at going public. Facebook had its IPO shot, but blew it. Lindsay says:

Will the current downturn provide the condition for the next Google to emerge--and if so where will it come from? The problem today is that today's Internet players have formidable cash piles which they can use to buy up almost anything. The venture capital players that brought the Internet sector into being have generally less cash to hand and are becoming increasingly interested in other sectors.

Buick, Oldsmobile, and Chevrolet were the high-tech industry of the early 20th century. They were gobbled up to become GM. I thought Lindsay was stretching a bit when I read through his research note. But then I pondered Yahoo, which has Flickr, Delicious, Rivals.com, Zimbra and a bunch of other properties in its collection. Are these properties really any different than the nameplates and brands that GM and Ford have?

Microsoft and Google are similar stories. Any company that may be a threat someday is gobbled up. In the last two years, Microsoft has made an acquisition every three weeks, according to a Wikipedia tally. Google has made an acquisition every five weeks over the last two years. And why are all of these acquisitions happening? Microsoft, Google, and Yahoo all have too much dough that theoretically should be returned to shareholders.

Lindsay writes:

We think having massive cash reserves causes the Internet companies to do the wrong thing. Microsoft has operated a loss-making online services division now for years. Current projections suggest that the company's online activities may lose $1.5 billion in 2009--just to keep the option open for Microsoft to expand its online activities in the future. The net effect of Microsoft subsidizing its loss-making online activities is that it creates problems for the other players--such as Yahoo and AOL. Having three Web 1.0 portals around in the current market ensures that there is overcapacity in display advertising. Nobody at the minute can get even halfway decent CPMs, because these three players are supporting three large sales forces, three ad serving platforms and are cutting each other's throat on pricing. Add to that the fact that all three are supporting one or two network/exchanges each. Each of the large Internet players owns an in-house ad exchange network now. This virtually ensures that nobody can get any pricing power in display and that the premium ad display business is constantly undermined by bargain basement pricing on the network/exchanges.

Lindsay says that Google is better than Microsoft and Yahoo but it's blowing money at a rapid clip on inefficient product development. The point: Companies with a ton of cash can be stupid. Would eBay have acquired Skype if it had to raise funding from Wall Street?

Lindsay's argument continues:

While we would be among the first to agree with the general principles of Chandler's "Coming of Managerial Capitalism" that consolidation is the inevitable corollary of increasing efficiency in almost all industries, we think the maturation of the Internet sector is being accelerated by the large players with big cash piles. Quite simply the Internet sector is getting old before its time because several large players are buying up just about anything that looks interesting and the venture capital sector is much less active. What makes things worse is that the large players are not doing much with these new technologies and innovative management teams once they take them inside. Nor is this necessarily a good situation for shareholders. We would further argue that today's internet players are increasingly acting like yesterday's media conglomerates. Arguably this has already been the downfall of AOL and has been a major factor in Yahoo's recent demise. The problem with the Web 1.0 portal model is that they all copy each other's strategies.

Examples of copycat "innovation" abound. AOL launches a photo site, Yahoo copies and then buys Flickr. MSN follows with a copycat. Google gets Picasa. There are four finance portals-AOL Finance, Yahoo Finance, Google Finance, and MSN Finance. It's a similar situation for personals sites. Are these sites really necessary?

The bright side: A downturn is forcing these companies to cut back on spending. Google may not need those additional data centers. Microsoft and Yahoo still may become pals. AOL.com will eventually merge into another portal. However, there are no guarantees that these Internet giants won't continue to be dumb with their dollars. If the likes of Google, Yahoo, and Microsoft continue on their current path they could be on a fast track to a Detroit-like future, argues Lindsay. He concludes:

To our grandparent's generation Detroit was the equivalent of Silicon Valley--we would rather the Internet remained a source of innovation and wealth for future generations.

[jessiethe3rd]

Having huge cash in the bank enables security and no matter how much shareholders may want to get their hands on it the majority will still rule - that majority is its chairman. Microsoft is smarter than GM and Ford and so is Google. Yahoo... not quite sure and personally I could care less if Microsoft bought them. Let's be honest here - it's good they didn't.

[slecalvez]

Wow, can't believe how stupid these analysts must be to compare these giants. Operational profits in the software business are huge, not like the razor sharp margins from any of these car makers. Microsoft, Google can have the luxury of subsidizing a different division or LOB with the profits from another one.

[MSSlayer]

Crap companies like MS, Yahoo, and Google have a few advantages over the auto makers:

1. They have no union to deal with. The UAW is a big reason the US auto industry is in the crapper.

2. Very few regulations to follow. The auto companies have to include legitimate engineering and QA into their products.

3. Unfortunately, software companies have little liability risk, so they put out third rate software with no real adverse effects.

[eagledrc]

Google is smarter than the rest. Yahoo, Microsoft, and AOL are just average. Their products are not particularly intuitive or genius. Google is simply amazing. (However, its great features are being copied by Yahoo, Microsoft, and AOL) Most people don't really use all that Google has. Google has so much to offer through SMS and web advertising. Android is so much better than the iPhone, it just has worse hardware. When a good carrier and a good manufacturer come out with a decent phone for Android, watch out Apple. Best of all, Google lends a hand to Linux and free, open source software. Microsoft generally bashes it.

[t8]

Couldn't agree more.

[jlm429]

the comparison is: ms, google, yahoo are today what GM, ford and Chrysler were 50 years ago

[t8]

Out of Ford, GM, and Chrysler, which one was the evil one?
Just trying to match Microsoft.

[Super2online]

The evil one was GM. They proposed to congressional leaders that they wanted to buy Chrysler, have the government pay for it so they could get the hands on Chryslers $10 billion cash hord. The thanks that Chrysler would get was to have every white collar worker fired and replaced by GM personel. This was their stated plan before approaching congress formally with Ford and Chrysler.

When I found this out, whether I like Chrysler or not, I vowed I will never own a GM product ever again. I have also vowed that I would repeat GM's approach to fixing their mismanagement problems whenever I had the chance to ensure everyone buying automobiles from this company would know what kind of treaturous miscrients they are supporting.

[trolleyRider]

"There are four finance portals-AOL Finance, Yahoo Finance, Google Finance, and MSN Finance. It's a similar situation for personals sites. Are these sites really necessary? "

I have 5 sports channels and 8 all news channels in my cable subscription. Are all these channels really necessary?

[Manhattan2]

Microsoft or Google should look at picking up the pieces at GM. If they would like to know why email us at SolarTransfer.

[Lagonder]

This really chimes with my experience studying the car industry and subsequently working for Yahoo. Henry Ford believed his design for the Ford T couldn't be bettered and wouldn't hear otherwise for many years - almost until it was too late. When I got to Yahoo the prevailing view was that Yahoo search couldn't be betterd. Why? Becuase the founders were still in charge. Founder hubris I called it. Breathtaking tunnel vision. Meanwhile those underneath were powerless to change anything or innovate. I don't think this was just Yahoo. There is an innate conservatism in 'new' media companies that means that they can only acquire innovation. They can't breed it. The US car industry quickly became the most conservative in the world once it had achieved dominance in its home market and never caught up with the competitors that emerged in Japan etc.