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11:02 AM
Paul McDougall
Paul McDougall

Why Microsoft's Yahoo Bid Helps Google, IBM, And Apple

A combined Microsoft and Yahoo would be a company truly capable of challenging Google in search and online advertising. At least that's what Microsoft believes. Not so fast.

A combined Microsoft and Yahoo would be a company truly capable of challenging Google in search and online advertising. At least that's what Microsoft believes. Not so fast.Just like Yahoo benefited from the chaos that followed AOL/Time Warner in 2000, Google would be the clear winner if Microsoft buys Yahoo for a proposed $44.6 billion.

Microsoft's rivals in other parts of the tech business -- including IBM in business software and Apple in the desktop market -- also would likely get a boost if this deal goes through.

The biggest risk: The sheer task of integrating Yahoo would suck up so much senior management time at Microsoft that the company, which already has a dubious track record for getting products out the door on time and has lost several key leaders in recent weeks, could fall behind competitors for years to come.

Google is taking aim at Microsoft's franchise Office productivity apps with a series of low-cost online offerings. Microsoft responded with its Windows Live online program. The problem: Windows Live is a confused mess that almost no one inside or outside of Microsoft really understands. Throw a major corporate integration effort into the mix and things get a lot messier.

Similarly, Microsoft is still nurturing its Windows Vista operating system a year after launch. Numerous reports indicate that that the OS is getting a cool reception from both businesses and consumers, and that Microsoft has failed to solve a number of compatibility issues that have PC users looking for alternatives.

Dell last year even took the unusual step of reintroducing Windows XP as an option on home systems.

On the business side, Microsoft this month is set to formally introduce Windows Server 2008. A plan to simultaneously launch SQL Sever 2008 was squashed amid more delays. SQL Server 2008 won't see the light of day until at least the fall.

It's clear that Microsoft is at a point where it can ill afford to take its eye off its core products. Yet that's exactly what a merger with Yahoo would do.

IBM, Google, and Apple, and even the Linux camp, must be loving this.

The risks for Microsoft might be acceptable if there was a strong chance that the goal of its proposed buyout of Yahoo -- catching Google in the online search and ad markets -- would be realized. But that's doubtful.

Yahoo is a reasonably strong competitor to Google, even though it gets about half of Google's online revenue and search traffic. Yahoo has thrived because it's the best portal out there in terms of content aggregation and building online communities.

By contrast, Microsoft has faltered in the consumer content and product arenas. MSN is an also ran, and gets a mere fifth of Google's search traffic. Truth is, Microsoft just isn't very good at creating products that appeal to a wide, nontechnical audience. Its internal culture reflects Redmond's geographic insularity, and Microsoft can't seem to grok what people really want.

The fact is, Microsoft reached its zenith at a time when PC buyers had little choice but to purchase a Windows-based machine. The culture of monopoly born of that still infuses most of the company's offerings today, even in markets where buyers have lots to choose from.

(How else to explain why the Zune music player debuted in just three colors -- black, white and brown).

What's the Zune got to do with Microsoft's Yahoo bid? The risk is that, under Microsoft, Yahoo would lose the consumer friendly focus that made it the Web's most popular portal and at the same time it might gain lots of ugly baggage.

Microsoft's slow and bloated MSN client software, for instance, has an "imported from the former Yugoslavia" feel. Any attempt to integrate Yahoo into that environment -- or maybe load it up with Silverlight -- would be disastrous.

The bottom line: A Microsoft buyout of Yahoo won't help it catch Google, but the ensuring chaos could seriously jeopardize its core Windows and Office products at a time when real alternatives are emerging.

Microsoft's best move: Stick to software, ditch the failed online efforts, and strike a partnership with Yahoo, or just take a minority stake.

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