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The Build for Google's Turf
Will it be boon or bust for Microsoft.
Wow. That was my first, second and third reaction to Microsoft launching a $44.6 billion takeover bid for Yahoo!. I'll leave the financial analysis to Wall Street, but it's worth considering whether or not this will be a boon for Microsoft and its developer customers, or if the company will get bogged down in the biggest case of corporate indigestion since AOL and Time Warner.
The risk isn't just that Microsoft ends up spending money without getting an effective online business, it's that it loses focus on its core Windows business as well. (In the interest of disclosure: I don't own shares in Microsoft, Yahoo! or any other technology company, other than those held indirectly through various index mutual funds.)
Before looking at what's next, it's worth considering why Microsoft felt the need to make a big move like this. Obviously, Google is the driver. Ever since the days of OS/2, Microsoft has been afraid of turning into the kind of slow-moving bureaucracy it saw in IBM. Now, Microsoft looks at Google and sees itself when it was younger, ready to take on an entrenched competitor. Microsoft, meanwhile, is playing the part of a 21st century IBM, a company with a large and profitable business to protect from a young and hungry competitor.
Redmond execs understand the cardinal rule of competition: It's much better to compete on the enemy's turf than your own. By taking the fight to Google in its core businesses of search advertising, it makes it harder for Google to challenge Microsoft's cash cows: Windows, Office and, to a lesser extent, the server businesses.
Buy, Not Build
Historically, Microsoft has preferred to build technologies, not buy them. It has nearly bottomless faith in its ability to write software and solve technical problems. But there's a reason that employees used to refer to the buildings that house MSN not as "Red West," the preferred corporate name, but "Red Ink West."
After years of struggling, it appears Microsoft has finally decided that the only way to success in the online business is to buy its way in. But the company is now putting $44 billion in the hands of the same people who are responsible for its less-than-stellar record so far.
On the plus side, there are obvious efficiencies in bringing the massive data center operations of the two companies together. But folding Yahoo! into Microsoft will also expand the set of services Microsoft developers have to build on. Yahoo! brings with it a number of online services that have developer APIs, including the very popular photo-sharing site Flickr and social-bookmarking site del.icio.us. And don't forget about Visual Studio -- it's an extremely popular development environment and Microsoft could use it to make the combined Yahoo!/Microsoft Web sites even more accessible to millions of developers.
At What Cost?
But buying Yahoo! could be costly; far more than the $44.6 billion Microsoft plans to give to Yahoo! shareholders.
Assuming the deal goes forward, Microsoft is going to be bogged down for 18 to 24 months sorting out overlapping technologies, picking winners and shuffling losers off to the Land of Misfit Toys. To see how Microsoft might manage that, it's helpful to look at another significant set of acquisitions the company has made.
In the course of 18 months in 2001 and 2002 it acquired two makers of software for small businesses: Great Plains for $1 billion and Navision for $1.33 billion. Microsoft has spent the intervening six years trying to straighten out the confusing product lines. Great Plains and Navision were a fraction of the size of Yahoo! and are still giving Microsoft heartburn. I'd sure like to have the Rolaids concession on this one.
In fact, this deal is so big and the integration so complex, it could easily distract the company from other important tasks. Microsoft Senior VP Kevin Johnson will have his hands full managing the integration of the two companies, but he's also responsible for Windows. The risk is that Windows development will go on autopilot at a time when the company needs to erase the bad memories created by the troubled launch of Windows Vista. Gaining Yahoo! at the expense of mucking up Windows 7 would be the ultimate Pyrrhic victory.
And just to keep things from being too easy, Jeff Raikes, the head of the division that produces Office, already announced that he will retire in September, turning the division over to a new hire: Stephen Elop, formerly of Juniper Networks and Macromedia.
So 2008 and 2009 look to be important years for Microsoft: a major organizational transition in one of Microsoft's most critical projects and the head of the other trying to sort out the biggest acquisition in company history, all while trying to keep Google at bay.
Stay tuned -- this one's going to be well worth watching.
About the Author
Greg DeMichillie analyzes and writes about Microsoft's development platform and tools for Directions on Microsoft, a research firm dedicated to tracking Microsoft. He was previously the group program manager at Microsoft responsible for the overall design and feature set for Visual C# and C++. A founding member of the C# language team, DeMichillie was a key contributor to the initial design and development of .NET.