Issue of the week: Microsoft bids a bundle for Yahoo

Oh, how the mighty have fallen,

Oh, how the mighty have fallen,” said Joe Nocera in The New York Times. “This may sound like an odd way to characterize” Microsoft, which just announced its willingness to plunk down $44.6 billion for a hostile takeover of Internet portal Yahoo. Yet despite its near monopolization of the operating systems and office software markets, despite its estimated $60 billion in revenue this year, it’s fair to say that Microsoft has failed. How can this be? In a word, Google. In the online world, Google is king, completely dominating the search engine market, which in turn has led to its domination of the rapidly expanding online advertising business. Currently, only 4 percent of Internet searches worldwide are done with Microsoft’s search engine, compared with more than 65 percent with Google. Microsoft now wants to team with Yahoo to try to cut into Google’s lead. But in a sense, Microsoft’s proposed acquisition of Yahoo “serves as confirmation that its glory days are in the past.” In fact, it has fallen so far behind Google that “even after a Microsoft-Yahoo merger, Google would still have twice the search market of its competitor.”

So why has Google launched a fierce counteroffensive against the proposed takeover? asked Michael Liedtke in the Associated Press. Google’s general counsel suggested this week that a Microsoft-Yahoo tie-up would stifle competition. Microsoft, he argued, could tweak its ubiquitous Windows operating system “so consumers are automatically steered to online services, such as e-mail and instant messaging, controlled by the world’s largest software maker.” Just a few years back, the U.S. Justice Department sued Microsoft for abusing its dominance in operating systems. Google fears that what’s past is prologue.

Google’s worries aren’t so far-fetched, said Chris Wilson in The conventional wisdom is that Microsoft is buying Yahoo to challenge Google in the search market. But “search is not the Web’s final frontier.” The next big growth area on the Internet is so-called cloud computing, through which consumers use Web-based applications to share photos, process documents, and coordinate calendars—tasks that until recently required software mounted on a PC hard drive. “Yahoo, Google, and Microsoft have all been ramping up to own the cloud.” Millions of consumers already use Yahoo as a portal to everything they want to do on the Web besides search, and Microsoft knows all about creating software applications. Combine their two areas of expertise, and you have “the ingredients for a powerful Google alternative.”

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That’s assuming that U.S. and European regulators approve a Microsoft-Yahoo merger, said venture capitalist John Dvorak in Don’t bet on it. Europe’s top antitrust enforcer, Neelie Kroes, has had Microsoft in her cross hairs for years, and this deal will sound “a red alert horn in Brussels.” Then again, that may be what Microsoft CEO Steve Ballmer is banking on. “If the E.U. kills this merger, as it should,” Ballmer can say he tried, but that “it was the meddling E.U. that ruined the deal.” An even worse case scenario for Ballmer is that the merger goes through and Google continues to run rings around the combined companies. That would be “the ultimate humiliation for both Microsoft and Yahoo.”

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