Microsoft and Yahoo: Shotgun Wedding

Microsoft (MSFT) desperately needs to acquire Yahoo (YHOO) to gain a significant foothold in the media world. To me, at least, this is very clear. Yahoo also needs Microsoft, although I’m not sure they know it yet. I think the merger force a level of clarity to both companies that they both sorely need.

Microsoft should restructure into four divisions:

* OS
* Office
* Media and Advertising (Yahoo! and Live)
* Entertainment (Xbox 360, games)

I’m not sure where TV should go, probably Media.

Anyway, they should then appoint Susan Decker from Yahoo! to run the media group. I think they can turn that into a wildly profitable business by combining Yahoo!’s sprawling empire with the many good, but underutilized Microsoft web properties.

If they are really smart they’ll also figure out how to unlock the value of Flicker, delicious, and the various other web 2.0 properties that seem to get lost in the Yahoo! shuffle. In my opinion, this largely arises from trying to hard to tie everything together. I personally think a more loose confederation – both in terms of management/teams and actual presentation to users – could dramatically increase the value of a myriad of smaller Yahoo and Microsoft web properties.

Maybe they’ll also figure out how to unconfuse this giant Live initiative that Microsoft has going. I mean, who names something “Microsoft Office Word Live 2008” …. the rate they are going it will be “Microsoft Office System Word Live 2009” or something. It’s confusing and makes no sense. Maybe Microsoft Word and Microsoft Word Live might work – where one is a license and the other is free with ads or subscription.

Anyway, I could see how this merger could fall into the “putting two rocks together just sinks them faster” category, but I don’t think that is the case. I actually think it could force clarity in a way that creates compelling outcomes. Of course, that requires someone with a strong force of will to run these divisions and make them successful. But at least, divided up this way it’s pretty clear who the competitors are for each group and, in my opinion, a relatively clear direction for each group.

Good luck to them both – I hope they figure it out.

(Disclosure: I own Yahoo shares. So yes, I hope they go up either through a Microsoft acquisition or through something else. I think an AOL deal might be interesting too if they could actually figure it out – but the Microsoft deal is far better.)

So, what do you think ?