Why Microsoft wants Yahoo!

Is buying Yahoo! a good move for Redmond?

So, at the back end of last week Microsoft stunned both the business and technology worlds with a gargantuan $44.6bn bid for the internet portal Yahoo! This represents a 62% premium on the stock (at that time), and represents for all intensive purposes, a hostile take-over bid. There is of course an interested third party in this move: Google. The king of search has long since seen off the threat of both Yahoo! and Microsoft, and has been ambitiously moving into new areas such as email, news, content and even toying with open-source operating systems and social networking. You simply can’t analyse the Microsoft bid without considering the influence of Google on both companies.

I wrote at the turn of the year about Microsoft’s need to concentrate on its principle business of software and operating systems: –

Facebook, search, web advertising and online music libraries, they all represent one thing: Microsoft’s desperate attempts to ape Google. It has failed and the biggest impact was on its core market: operating systems. Vista is a car-wreck mainly because it feels cobbled together, which is astonishing considering the time Redmond spent on its gestation. [I predict] XP will get its service pack 3, and Vista may even get a major update too.

So is Microsoft now concentrating on its core business?

No, it’s bidding for Yahoo!, a move that represents another desperate attempt to buy itself out of trouble. MSN Search and the MSN portal itself have been disasters. Google does search, advertising, video and online tools better than Microsoft, Yahoo! has a huge share of content with the massively popular Yahoo! News and the wonderful but unprofitable flickr (among others), and Gates and Co. are nowhere on the social networking or news aggregation scenes.

Okay, Microsoft is a leader in email and operates a successful messenger client, but these were both early ventures and ones where users are famously reluctant to migrate. Changing an email or contact list represents quite a bit of work, compared to flitting between news providers. This explains why Gmail, Google’s user-friendly and powerful email service, has such a low market share.

Microsoft simply isn’t an online services business. It’s a software business, famous and rich because it produces the world’s most popular computer operating system and office tools. So why is it so obsessed with making a splash online? The answer lies with Google and its huge cash-generating advertising business. Microsoft knows that future growth in revenues will come from advertising and that Google stands in its way.

So why not just concentrate on software and make money from that?

Making money on software is what Microsoft are best at. But as we’ve seen with Vista, they’re just not putting their heart into it. For all the hype that surrounded Vista’s launch, it’s incredibly wasteful with hardware and full of compatibility issues. Buyers of new PCs are downgrading to XP in their droves, and commentators are dismissing Vista with the ultimate insult: they’re calling it the new Millennium Edition, that most maligned of Windows builds.

The ultimate downside of Vista’s struggles is that it opens the doors for competitors. Apple’s OSX is gaining market share and more and more people are seriously considering moving to a Linux-based system such as Ubuntu. Indeed, ASUS’s dinky and much-loved EeePc is Linux based, and as the Duke of Dork Stephen Fry explains, this is scaring the hell out of Microsoft. Are they going to be able to continue to charge several hundred pounds for products that are free elsewhere?

So it’s a strategic nightmare for Microsoft. Their obsession with tapping into alternative revenue streams has seriously undermined their core business, and as such their original – and unbelievably sucessfull – profit-model is under even greater threat. By buying Yahoo!, Microsoft hopes to acquire an off-the-shelf business model that will ensure that MS is at the table when the advertisers splash the cash. Time will tell if this strategy will work. Integrating huge media businesses is not always successful – just look at AOL-Time Warner (remember them?). However, this move is also likely to piss-off Google (who were rumoured to be interested in buying Yahoo! search business), who may push harder in areas historically dominated by Microsoft. Odds on a Google-flavoured Linux build must be shortening by the day.

A fair bit of the theory here was inspired by a recent episode of TWiT.

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