Steve Ballmer’s big bet
Has Microsoft lost the plot? It’s audacious, US$44bn-plus hostile bid for Yahoo, announced on February 1, shows clearly that it has been spooked by the rapid rise of Google. But is buying a has-been Internet company the solution? It’s been little more than three decades since Bill Gates and Paul Allen founded Microsoft in the desert town of Albuquerque in New Mexico in April 1975. In a few short months, Gates will step down from his day-to-day responsibilities as chief software architect, leaving CEO Steve Ballmer in full charge of the software maker’s future direction.
Gates, who wants to spend more time on philanthropic pursuits, is leaving at a critical time in Microsoft’s history. It may seem hard to believe, especially given its recent financial performance, but Microsoft’s core business is under threat. Windows is under attack from open-source rivals, especially Linux, and Office, its other big money spinner, could be undermined in the next few years by the move to Web-based applications, an area being pioneered by Google and others.
Every so often the computer industry is transformed by a sea change in technology. The last time this happened was in the 1980s, when the world moved from mainframe and mini computing to PCs. The mainframe era, led by IBM, gave way to the world of client-server computing, led by Microsoft. Now analysts say the industry is going through another tectonic shift. Computing is going online.
It’s already evident: with broadband, people increasingly use Web-based e-mail systems, doing document processing online and running their calendars on the Web. The fear for Microsoft is that the business model they’ve relied on for the better part of 30 years is dying. Think about it: why would you buy an expensive office suite if all the functionality you needed was provided free or cheaply at the other end of broadband connection? Already, Google Apps provides basic productivity tools such as e-mail, word processing, spreadsheets, presentations, instant messaging and calendaring. And, unless you’re a big business, it’s all free, supported through advertising.
It’s in this context that Microsoft has made its hostile bid for Yahoo. The offer, which has been rejected by Yahoo’s board, smacks of desperation. Microsoft, which has been trying to build an online business for years, has watched as Google cemented its dominance of Internet search and online advertising.
According to market research firm Compete, Microsoft’s search engine, Live Search, had only 8,7% of the Web search market in January, down from 8,9% 12 months earlier. In the same period, Google improved its market share from 61,9% to 68,6%. Yahoo was the biggest loser, collapsing from 22,7% of the market in January 2007 to just 16,7% last month. So, a combined Yahoo/Microsoft would still be overshadowed in search — and related search advertising — by Google.
So why is Microsoft so desperate to do the deal? After all, the two companies’ cultures are diametrically opposed. Yahoo is a product of Silicon Valley, and there’s a strong enmity among firms there towards the Seattle-based Microsoft. Recruitment firms are already circling Yahoo, hoping to pick off talented people who want nothing to do with Microsoft.
The biggest challenge for Microsoft, though, may be the fact that it is buying a company that is past its prime. Yahoo has been steadily losing market share to Google. Its only sexy property is photo-sharing site Flickr.
Integrating the two companies, while retaining market share in search, will require a Herculean effort by Microsoft. One has to wonder whether it ought to risk losing focus at this critical juncture in the industry. Perhaps it knows that, with its business model under threat, it has no other option.
First published as the column Technology & You in the Financial Mail of February 22 2007
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