If I'm correct, this could be a treacherous time for Google unless Google makes some preemptive moves. It wasn't long ago that Microsoft and AOL were in serious discussions about a joint venture. While Google won in the end, they were very late to the dance and only won because they were a better strategic fit. Let's hope that Google is ahead of the curve in the coming round of consolidation.
Why Consolidate?
Because each of the players, even Microsoft, needs a bigger user base to be able to negotiate from strength with the network gatekeepers for access to customers. The network gatekeepers like Verizon and AT&T have already consolidated, and now have the market power to tax the content providers unless the providers bulk up and become too big to bully.
It also takes an immense amount of capital expenditure to stay competitive. Google is spending nearly a billion bucks a year on new data centers and facilities, plus another half-billion on R&D. This is a lot for Google, with a $100 billion market cap. It's impossible for Amazon or eBay to keep up with this torrid pace of innovation and investment.
And because each of the players has strategic vulnerabilities that will limit their options and increase their costs if they're not addressed:
- Microsoft - saddled with 5-year-long software release cycles, threatened by network-centric computing and brain drain, distant third in search and online ads; has $60 billion in cash and desktop dominance
- Google - very small user base, minimal content, fledgling ecommerce, no social recommendation capability, one-trick pony; #1 in search, #1 in traffic, #1 in innovation, $10 billion in cash and a strong stock
- Yahoo - losing search market share, constrained R&D budget limits innovation; highly profitable, massive user base
- eBay - slowing growth, marketplace threatened by search; strongest marketplace and payments network
- AOL - dying dial-up business, reputation as a walled garden; massive user base and access to Time Warner's content
- Amazon - too small to justify the perpetual R&D investment needed to stay competitive; massive user base, #1 in ecommerce, #1 social recommendation technology
Here's my handicap of the most likely combinations:
Yahoo + eBay - It would have to be a merger of equals, since neither has the capacity to acquire the other. Scot Wingo reasons that "yBay" would be "about the same mass of Google," with competitive products in search, VOIP, shopping and payments.
Google + AOL + Amazon - Google and AOL have already partnered and are integrating content, advertising and IM networks. And while Google shouldn't buy Amazon's distribution centers and inventory, picking up Amazon's technology, patents, content, user base and social recommendation engine would strengthen many of Google's strategic weaknesses.
Microsoft + ??? - Microsoft has the cash, but who would they buy? Microsoft could buy Yahoo outright, and Yahoo's properties and user base would be a nice complement to Microsoft's. Microsoft and Yahoo are already promising to integrate IM networks, but it's hard to imagine Yahoo's open-source applications meshing with Microsoft's platform. (It was hard enough to move Hotmail onto Windows.)
Microsoft could also pay cash for eBay, but it's hard to see the strategic fit -- Microsoft isn't a marketplace, and with the exception of Skype, eBay doesn't solve many of Microsoft's challenges in search, advertising, web applications, or media.
As a Google investor, I'm betting on a combination with Amazon. But if "yBay" happens first, or if Microsoft makes a big move, Google's stock could get hammered.