Microsoft\u2019s decision to walk away from Yahoo leaves both companies in a bind, with the former looking increasingly marginalised online and the latter with much to prove to shareholders. All the while, Google grows stronger.<\/p>\n
Yahoo founder and CEO Jerry Yang can declare a victory \u2014 of sorts. Yahoo has forced Microsoft to retreat to lick its wounds. The proverbial David (Yang) took on Goliath (Microsoft CEO Steve Ballmer) and won. But at what cost to Yahoo and the broader Internet industry?<\/p>\n
At the weekend, Ballmer sent a bristling letter to Yang, outlining his reasons for not pursuing the deal. Ballmer made it clear that he thought a plan by Yahoo to use rival Google\u2019s online advertising system \u2014 a poison pill of sorts designed to keep Microsoft at bay \u2014 would harm the company. It would \u201cfundamentally undermine Yahoo\u2019s own strategy and long-term viability\u201d by fragmenting its search and display advertising strategies, Ballmer said. This, he added, would undermine Yahoo\u2019s reliance on display advertising to fuel future growth. \u201cIt would impair Yahoo\u2019s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.\u201d<\/p>\n
Yang is probably relieved to have Ballmer off his back but must now prove to his shareholders, especially those who wanted the Microsoft deal to happen, that he has what it takes to retake market share from Google. He has perhaps 18 months if he wants to avoid being ousted from the company he founded.<\/p>\n
Based on past performance, Yahoo will find it difficult to make any sort of headway against Google, particularly in search, where it has been haemorrhaging market share.<\/p>\n
And Ballmer, in his letter, is probably right: if Yahoo does a deal with Google, it could prove to be its undoing. It would hand control of its biggest revenue stream to its fiercest rival.<\/p>\n
Yang is not the only one under pressure, though. Microsoft watchers are increasingly questioning whether Ballmer is the right man to lead the company through arguably the most challenging transition in its history.<\/p>\n
Microsoft\u2019s business model is under threat as the computer industry moves from a model of shrink-wrapped software to one where software is delivered as a service \u2014 sometimes free and supported by contextual advertising \u2014 over the Internet. It\u2019s an area that Google has pioneered. Microsoft is a Johnny-come-lately that is only now starting to retool its applications for the Web.<\/p>\n
Is it too late to the party? Perhaps not. In the mid-1990s, Microsoft appeared oblivious to the impact of the Internet on the computer industry. When it eventually woke up, it lashed out angrily and, within a year, rival Netscape Communications was mortally wounded. Of course, the company was tackled by antitrust regulators and is still under close regulatory scrutiny to this day. This oversight probably prevents it from being as aggressive as it would like to be in tackling Google. But the company, under Ballmer, also seems to have lost some of the fire, the sheer desire to win at all costs, that it had in the 1980s and 1990s when Bill Gates was still CEO.<\/p>\n
There are still plenty of options open to Ballmer. Microsoft could pursue any number of smaller acquisitions to build bulk online. But this will take a long time. The company\u2019s best bet might be to risk the wrath of regulators, particularly the European Union, by closely tying its online services into Windows 7, due sometime in 2009 or 2010.<\/p>\n
It is, after all, in consumers\u2019 interests that Google has a formidable competitor to keep it in check and keep prices down. If not, it could end up dominating the new era in computing as thoroughly as Microsoft dominated the last one. And that can\u2019t be a good thing.<\/p>\n