February 1 2008: 11:34 AM EST
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Microsoft inherits the peanut butter

With its patchwork of products and services, Yahoo has been spread too thin for a while. How does superimposing another giant help?

By James Ledbetter

(Fortune) -- What exactly is Microsoft trying to buy today? Well, last I checked, Yahoo operates a Web search engine and related Internet properties used by almost half a billion people around the world.

We've all seen the ads a million times, and before Google (GOOG, Fortune 500) came along Yahoo was one of the best places to find stuff on the Internet.

But here's a few other things Yahoo (YHOO, Fortune 500) owns and operates, most of which you don't see Eskimos using in TV commercials; Flickr, a first-rate photo site; Right Media, a cutting-edge interactive advertising exchange; 44% of Alibaba, one of the world's largest portal and business-to-business sites, based in China; Blue Lithium, an ad network; del.icio.us, the social bookmarking site that seems to have faded a bit; Zimbra, an open source service site; MusicMatch, a poor cousin to Apple's (AAPL, Fortune 500) iTunes; auction sites in Hong Kong, Singapore, and Taiwan; and......well, you get the idea.

How can one company, even if it employs some of the smartest and most creative people on the planet, run so many diverse businesses successfully? It can't. It never has.

Lack of focus

Yahoo is spread way too thin in way too many directions, and that lack of focus has been hurting its core business - search and Web 1.0 advertising - for a few years now. This was the thesis of Yahoo senior vice president Brad Garlinghouse's famed Peanut Butter manifesto, which is as relevant today as when he wrote it in November 2006:

"We lack a focused, cohesive vision for our company," he wrote at the time. "We want to do everything and be everything - to everyone....I've heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."

It's a supreme irony that this ultimate New Economy Silicon Valley icon managed in a few short years to re-create one of the biggest problems of the industrial era: it's a conglomerate, and having invested billions in disparate properties, it can't make the pieces work together.

It has (well, until the layoffs announced this week) more than 11,000 employees and footprints around the globe, but in almost none of its businesses is it the number one or number two player; indeed, it's usually so far down the list as to be irrelevant.

History as a guide

So how is superimposing another conglomerate from Redmond going to help this problem? It's not. The history of massive companies merging with other massive companies - think DaimlerChrysler, or AOL and Time Warner (TWX, Fortune 500) - is not encouraging.

True, there are probably a few synergies that Microsoft (MSFT, Fortune 500) can wrestle out of Yahoo's smaller holdings, but they're also going to have to shut some down and sell others. Even then, however, the combined company will have a staggering 90,000 employees. The technology field requires innovation, and companies of that magnitude rarely specialize in innovation.

Yes, Microsoft needs Yahoo's online presence in order to compete with Google, but if they think it's going to be easy to swallow this company whole, they may end up choking on it. You can't solve a peanut butter problem by adding roast beef to the sandwich. To top of page

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