Yahoo Offer Is Strategy Shift for Microsoft
By STEVE LOHR
Published: NYT, February 2, 2008

Remember two of my recent postings highlighting the challenges facing Microsoft against Google in “the cloud”. My guess is that Microsoft is looking well beyond the current way of attracting ad revenue from the internet and will leverage their incredibly strong software capability with Yahoo’s access and reach – imagine the current Office Suite available on demand on line!

Google Gets Ready to Rumble With Microsoft 12/27/07
http://marketdrivengrowth.blogspot.com/search?updated-min=2007-01-01T00%3A00%3A00-05%3A00&updated-max=2008-01-01T00%3A00%3A00-05%3A00&max-results=50

Google and the Wisdom of Clouds 1/01/08
http://marketdrivengrowth.blogspot.com/2008/01/google-and-wisdom-of-clouds-lofty-new.html

But on Friday, the brand of capitalism practiced by his company’s chief executive, Steven A. Ballmer, came with a decidedly hard edge.

Microsoft’s $44.6 billion bid for Yahoo, pushed by Mr. Ballmer, was hostile. And during a conference call Friday with analysts and in a subsequent interview, he never once uttered the word “Google,” referring to the Internet search giant that has humbled Microsoft only as “the leader” in the online world.

Mr. Ballmer, 51, is a famously fierce competitor. To him, failure is never an option. “If we don’t get it right at first, we’ll just keep coming and coming and coming and coming,” he said in an earlier interview.

Microsoft’s bid for Yahoo is thus a tacit, and difficult, admission that the company did not get its online business right. The bid also represents a sharp departure from Microsoft’s well-thumbed playbook of building new businesses on its own. In the past, when Microsoft moved beyond its stronghold in desktop computer software — and into areas like video games and data-center software — it has done so mainly with in-house investment, patience and tenacity.
Microsoft stuck to that formula for years with its Internet search and advertising — without success. It did buy an online ad agency, aQuantive, last May for $6 billion, a sizable move given Microsoft’s tradition of making small, niche-filling acquisitions.
The losses, however, continue to mount in Microsoft’s online business, while Google makes billions in profit.

The Google challenge to Microsoft extends beyond online search and advertising. Google is at the forefront of companies offering software as online services, including Web-based alternatives to Microsoft’s lucrative desktop products like word processing, spreadsheets and presentation programs………..
…….And Mr. Ballmer clearly views the Yahoo bid, and the Google threat, in broad terms. A Yahoo deal, he said, would represent “the next major milestone in Microsoft’s transformation.”
Microsoft, too, is moving to offer more software features as Web-based services, though it sees a future that revolves around both personal computer software and online services.
Microsoft has been forced to adopt a new strategy for a different kind of threat than it has confronted, and usually dispatched, in the past.

“This shows just how worried Microsoft is by Google,” said David B. Yoffie, a professor at the Harvard Business School. “Microsoft has faced competitive threats before, but none with the size, strength, profitability and momentum of Google.”………
……….Microsoft, analysts say, finds itself in a battle where improving its search algorithms and online ad software is not going to be enough. Google has impressive technology, to be sure, but it also enjoys the torrid growth that falls to the leader in highly networked businesses like Internet search and ads.

Google’s edge in search traffic then attracts more advertisers and Web publishers, so there are more ads in Google’s auctions, which makes them more efficient. Each advantage reinforces the other, in what economists call “network effects.”

One measure of the network advantage, analysts estimate, is that Google collects 40 percent to 100 percent more revenue per search than either Yahoo or Microsoft.
Microsoft, of course, is no stranger to the power of network effects. It was the master of that strategy in the personal computer era. Its early lead in PC operating systems, and its efforts to encourage independent software developers to write applications for Windows, paved the way for Microsoft’s dominance.