Yahoo-Microsoft Rift Leaves Wake Of Angst
A lot of people - especially its stockholders - are worried about the future of Yahoo now that Microsoft has backed away from its offer to buy the company for $47.5 billion. But Microsoft shareholders also have reason to worry.
Bill Gates, with a lot of help from Steve Ballmer, built the Microsoft on the back of the personal computer. Ballmer is now CEO of Microsoft and, starting in July, he'll no longer have Gates as a work make. Although he'll remain as chairman, Gates is retiring from his day-to-day responsibilities to devote more time to philanthropy.
As early as 1975, Gates saw the potential of PCs, predicting that the growing platform would create an enormous appetite for software. In 1981, he cemented Microsoft's role by signing a deal to create the operating system for IBM's first personal computer. Even though there wasn't even a hint that Compaq would eventually release the first "PC clone," Gates was smart enough to make his IBM deal non-exclusive allowing him to ink lucrative software deals with Compaq and eventually Dell, HP and the myriad of PC makers who needed Microsoft software to be sure their machines were compatible with the then gold standard IBM PC.
Gates, Ballmer and the thousands of other Microsoft employees rode this platform to such highs that they eventually wound up, literally, monopolizing the world's desktop operating system market, prompting the U.S. Justice Department and governments around the world to file a variety anti-trust cases against the software giant. In 2000, U.S. District judge Penfield Jackson found Microsoft guilty of anti-trust violations and ordered the company split in two with one entity in charge of desktop software and the other able to sell operating systems. After a change in administrations, the Justice Department ultimately reached a less stringent settlement that allowed Microsoft to remain intact while promising to modify its behavior and submit to ongoing scrutiny.
During the midst of the anti-trust fervor, Gates told a Congressional hearing that market forces, not the government, should be in charge of determining who's on top. "People who feared IBM were wrong," he told a Senate Judiciary hearing in 1998, "technology is ever-changing." A lot of people thought that was hyperbole, but in some sense history proved Gates to be right.
That very year, two graduate students from Stanford set up shop in a garage in Menlo Park, California and raised $100,000 to start Google, a Web-based company that's now worth about $186 billion. If they were to combine their net worth, Google co-founders Larry Page and Sergey Brin would be number three on Forbes' list of the world's wealthiest people. As it is, they share the number five spot.
Although Microsoft continues to be a powerful and profitable company, it has continually faltered where Google has succeeded. It's not as if Microsoft hasn't tried. It launched Microsoft Network, MSN, back in 1995 and promoted it so heavily on the Windows 95 desktop that some people worried it would be the death knell for all other online services. It wasn't AOL wound up dominating the field until it too started to falter as broadband penetration ate up much of its dial-up business. Microsoft Hotmail came along in 1998 and the company has continued to invest in MSN and other Internet services. From a features perspective, it competes very well with Google, Yahoo and AOL. Like Alice's Restaurant, you can get pretty much "anything you want" at Microsoft's various websites. But, in February 2008 Comscor ranked Microsoft a distant third in search sites with 9.8% share of behind Google (58.5%) and Yahoo (22.2%). Microsoft also came out third in total visitors. Yahoo came in first followed by Google, Microsoft and AOL.
Yahoo's number one position at attracting visitors and number two spot in search is not lost on Steve Ballmer, especially as he eyes Google's enormous earnings from Internet search.
With its online services division losing an estimated $745 million in the past three quarters, Ballmer has to find a way to turn things around without the help of Yahoo.
That's not going to be easy as the technology landscape turns from PCs to web-based and mobile applications and as consumers greatly overtake businesses as the most important technology buyers.
For the first 25 years of its history, PCs were pretty much the only game in town when it came to information and productivity applications but Microsoft is fighting Google, Yahoo and others on two fronts. Though Web-based productivity applications are still in their infancy, Google has shown that it is possible to bring Microsoft Office-like applications to the web. Gmail (along with competing products form Microsoft, Yahoo and AOL) is serving needs that once required desktop mail applications such as Outlook. But perhaps more importantly, Google Docs and Spreadsheets is now competing with Microsoft Office. I'm not saying that Google's free web applications are going to put Office out of business. For example, I'm writing this column in Microsoft Word because it has far more robust features than Google and I still use Excel when I need a complex spreadsheet. Besides, there are times when people need these applications when they don't have Internet access.
But times are changing. Web-based applications from Google and others are only going to get better and Google has already launched programs that will run when you're not connected to the Internet. In the mean time, Microsoft faces operating system pressure not just from Apple (which is gaining in market share) but from Linux - a free "open source" operating system that's growing in popularity, especially in the developing world where the cost of Microsoft software is simply prohibitive.
We're also seeing the growth of the mobile phone as a platform of choice. Again, if you look to the developing world, you'll find that cell phone penetration is far higher than PC use and as cell phones become more powerful, people are starting to use them instead of PCs for email, web surfing and even financial transactions. Microsoft has spent billions trying to compete in this market with its Windows Mobile products but despite some pretty good sales, it's not winning too many comparative reviews against RIM's Blackberry software and Apple's highly regarded iPhone. And even in this arena Microsoft has to worry about Google which has recently launched development software cell phones and Yahoo which is trying to move most of its web services over to mobile phones.
So, with this as a backdrop, one wonders what Steve Ballmer will do. He hasn't confided in me, but after watching him and Gates for nearly a quarter of a century, I think I know a thing or two about their tenacity. Ballmer won't give up. He'll continue to keep an eye on Yahoo and perhaps come back later - maybe with a lower offer - if Yahoo continues to stumble. And he'll keep shopping for smaller companies or perhaps AOL all the while continuing to invest money in Microsoft's own web services.
By Larry Magid