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Microsoft, underdog2007-05-10 Analysts are downplaying US newspaper reports that Microsoft will buy Yahoo in a deal that could be worth as much as US$50bn. But talk of a deal illustrates how desperate Microsoft has become in the face of the Google juggernaut. The enemy of my enemy is my friend. This ancient proverb describes well the emerging relationship between Microsoft, the world’s biggest software company, and number two Web search company Yahoo. They have a common enemy: Google. The New York Post last Friday reported that Microsoft was in talks with Yahoo with a view to buying the company. Yahoo’s share price responded by jumping almost 20% in intraday trade. Analysts have subsequently downplayed the report, saying it’s more likely that the two companies will seek a broad-ranging partnership instead. The speculation comes just weeks after Google, which dominates contextual search-based advertising, said it would buy DoubleClick for $3,1bn. DoubleClick is the Internet’s largest broker of Web display advertising, an area where Google has trailed behind Yahoo. Microsoft also coveted DoubleClick. That Google beat it is a big blow to its ambitions to build a powerful online business supported by advertising revenues. Microsoft is way behind Google and Yahoo in online advertising. Goldman Sachs analyst Sarah Friar recently told The Economist that Google would make an operating profit of more than $5bn this year and grow at a rate of 36%/year for the next three years. Yahoo would make $3bn in operating profit, growing by 20%/year. But Microsoft would lose $2bn this year and even more in the next two years. Microsoft is desperate to compete in a market that is increasingly dominated by Google. For Microsoft, the company represents more than just an obstacle to a lucrative new revenue stream. It also poses a threat to its bread-and-butter software business. Google is developing a Web-based office suite that competes with Microsoft Office. Though Docs & Spreadsheets, Google’s offering, is not nearly as feature-rich as Office, most people use fewer than 10% of the functionality in Office anyway. Google offers users a basic word processor, a spreadsheet application and, soon, a presentation manager. It already has comprehensive online e-mail and calendar software in Gmail and Google Calendar. The danger for Microsoft is that the more consumers use Google’s free tools — for e-mail, for sharing photos, for watching video — the more they’ll begin to use the company’s services for doing their day-to-day work. For Microsoft, Google must be stopped. And that makes Yahoo, Google’s biggest competitor, a juicy target. Buying Yahoo would help Microsoft make up ground. But the deal would also carry big risks. It could result in management of both companies taking their eye off the ball while they merge the two companies’ operations. Culturally, Microsoft and Yahoo are also very different companies. Yahoo cofounder Jerry Yang reportedly dislikes Microsoft to such an extent that he refuses to use the company’s products. Ri Pierce-Grove, an analyst with market research firm Datamonitor, says that acquiring Yahoo would significantly boost Microsoft’s capabilities but the integration of the operations could present “thorny cultural and technological challenges”. Microsoft is one of the world’s most profitable companies. It didn’t become the most influential company in IT through luck. It produced products that the market craved, competed aggressively with rivals and cemented its dominance by developing a powerful network of partners. The question now, though, is: does it still have what it takes to compete in an industry that is rapidly being transformed by the Internet? Source: My Broadband |
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