It’s been 10 days since Microsoft-Yahoo deal was called off by Steve Ballmer, and in the days that followed the commentary and speculation has been churning at record pace.

Several times last week I was tempted to write this post, only to hold off for a while longer because I wanted to write something for my readers that would go well beyond a news rehash.

As I said in previous posts, it is easy to lose sight of the essentials in the dizzying onslaught of "Steve said, Jerry said…" titillation, investor and market timer stock price considerations, and "what’s the next step" agonizing. Instead let’s go back to Business Mind Hacks basics:

I have argued that the deal was never a good idea in the first place, and that this should have been the first and foremost question on anyone’s mind. Even now, there appear to be major Yahoo stockholders such as Carl Icahn, who are attempting to employ corporate board machinations to force the deal after all.

And of course there has been plenty of speculation that Microsoft would come back with the same or lower offer after having Yahoo’s stock price pummeled for a little while (incidentally, it didn’t go down quite as much as some had predicted, possibly a sign that the market viewed the deal was as in fact much less of a clear winner).

None of it would really matter as far as the fundamentals of the deal: That Google is the uncontested market leader in search and paid search ads, that neither Yahoo nor Microsoft have been able to compete effectively, and that they are falling further behind every day. (Notice recent earnings data showing Google’s search revenue is on track to surpass Microsoft’s flagging Windows/Vista revenues some time in 2009!)

There are several reasons for this, some technical, and some Branding/Positioning related and hence much more basic than the complex issues relating to e.g. paid search optimized monetization. I will further discuss the latter in another post. Let’s go with the branding issues for today.

A recent article in The Economist picks up on the same theme I have been "hammering" in a few recent posts:

Mr Ballmer […] has invested billions trying to make Microsoft an internet and advertising superpower. But it seems not to matter. According to Danny Sullivan, a web-search analyst, Microsoft “literally has no brand” when it comes to its online services—nobody has ever been advised “to Live” or “to MSN” a recipe or a cute classmate.

But it gets better. While The Economist article was an overview piece on the break-up of the negotiations, ReadWriteWeb wrote a post entitled: "Microsoft’s Brand Confusion Runs Deep". And I couldn’t agree more with the tenor of it, and if you care about branding/positioning issues at all you should by all means read the full post. Here is a sample:

[…] slight differences in design may not be a very substantial issue, it is indicative of the confusion Microsoft has created around their Live brand. […] Live was sometimes used to brand services, sometimes to brand desktop products, and sometimes destination sites. Worse, at times single products have had multiple names and sometimes the Live branding resulted in very clumsy product titles, such as "Windows Live Search for Windows Mobile."

And in all of this, ReadWriteWeb didn’t even point out the widespread but perennial corporate sin of brand dilution: While it is easy to see how large, powerful companies would prefer to engage in a sort of "brand hubris" and try to spread their brand-around to everything in sight, this just isn’t how things work at the level of the customer’s/consumer’s mental circuitry.

Ries & Trout made it abundantly clear in their seminal works on the matter, and data of decades’ worth of branding studies back it up: Once you have been lucky enough to establish your brand in a category/niche, you should avoid trying to stick it on other categories like the plague.

Because it confuses people, it quite literally messes with their mental mapping of names and what they stand for. It is quite noteworthy in this regard that the ReadWriteWeb post mentions that even Microsoft’s own employees appear at times confused about what "something-something-Live" really stands for!

If you think about it, as far as catching Google is concerned, Yahoo hasn’t been able to do it with moderate resources, but even worse, Microsoft/MSN/Live hasn’t been able to do it with nearly unlimited resources. Why?

Because the Windows/Microsoft brand acts as an albatross around the neck of any Internet play that they have attempted: Henry Blodget over at the Alley Insider already pointed out the unfortunate renaming of Hotmail into "Windows Live Hotmail", and they were even seriously considering ditching the Hotmail brand alltogether.

Horrible idea… and it truly makes you wonder about what might have happened to the (not perfect, but still much preferable) Yahoo brands in the case the Micro-hoo deal had gone through (or still might in the future).

Again, Ries & Trout point out that large companies are always in danger of, from the inside out, hastening their own brand dilution. This is because of the fallacy of the "we’re a big/strong/important brand" mindset, which makes "add-on-naming" things with your existing brand so seductive and almost impossible to argue against in say a company meeting. Nobody wants to be seen as arguing against their own brand, their own "tribe".

As I said, unfortunately it is wrong from a psychological perspective of how brands work in the minds of the consumers. It’s all about "tip-of-mind awareness" for a category. Simply ask "What is a ____?" If the answer is unclear, your brand is already diluted.

Kraft is a good example of this form of brand dilution. Incidentally, their only #1 brand is the one that they resisted naming "Kraft": Philadelphia Cream Cheese (by Kraft). Everyone knows the answer to the question "What’s a Philadelphia?" (in a food context). But "What’s a Kraft?" has no such clear answer.

A company that has done it right is Proctor & Gamble. Each one of their products tends to be built up as its own brand, and typically is the category leader commanding a serious premium: Tide, Dawn, Bounty, Duracell, Gilette, etc. (see the full list of P&G brands here). 

Test it, you’ll likely know the answer to almost each question: What’s a ____?

So Microsoft should create a new internet product that is for once NOT named MS or Windows, because frankly, the internet thing has little or nothing to do with Windows. It appears that it’s their built-in (maybe even unconscious) resistance to the internet that is always at play.

Which is another bad idea. You can’t let your ego get in the way.

What became the leading Web video site? "YouTube", and NOT "Google Video", and even less some theoretical monstrosity like "Windows Media Player Web-Edition Live Video Sharing… Site". 🙂

But Google had the good sense to let it go and simply acquired YouTube, while resisting the temptation to meddle with the brand. Their reward: A brand name that is already firmly anchored in the minds of consumers as THE video sharing site. "What’s a YouTube?" has a crisp and clear answer. Which is as it should be.

I rest my case… for today… more to come soon.