Microsoft-Yahoo Combo Could Accelerate Services Strategy

However, integrating these services may cause major headaches as Microsoft tries to keep customers and keep executive focus on its other businesses.
Like Microsoft, Yahoo has been busy building huge data centers to scale its online business. It's built its own 140,000-square-foot facility in Quincy, Wash., right down the road from one of Microsoft's main data centers and is reportedly building others in such far-slung places as Switzerland.

Microsoft's been spending billions recently on data centers, so these physical assets should provide Microsoft with new horsepower to scale services for consumers and businesses alike. That said, even this is not without significant challenges. The two companies' data centers reside on drastically different infrastructures, and Microsoft took a long time even integrating its own technology into Hotmail, according to Directions on Microsoft's Helm.

Though Yahoo has long focused on Web search, the combination of its search team and Microsoft's could free up more resources to work on deeply integrating Microsoft's desktop and Web search efforts. Windows Vista has the capability to search the Web directly from its desktop search bar, but the user interface is such that a search still opens up a Web browser to do the actual searching.

With efforts like Windows Live Photo Gallery, Office Online, and SharedView (part of Office Live Workspaces), Microsoft is working to divorce some online functionality from the browser and build it directly into Windows and Office. The combined engineering talent of Microsoft and Yahoo could put significant work into making this mode of "software plus services" as Microsoft calls it, more pervasive. The combined talent, however, could become depleted if Yahoo employees decide to take the money they'll earn with the 62% premium Microsoft' s proposed purchasing price places on Yahoo.

Yahoo, like Microsoft, is connected to developers through the Yahoo Developer Network and developer tools like mashup tool Yahoo Pipes, and has engineers versed in the Web and mobility.

"Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced," Microsoft CEO Steve Ballmer said in a letter to Yahoo's board of directors Thursday night.

The deal could also affect relationships Yahoo has with other major technology companies. For example, Yahoo and IBM offer a joint free enterprise search product. Seeing as how Microsoft also competes in the space, it's not clear how that relationship could continue. Yahoo also has significant content deals with service providers like AT&T, and the Yahoo brand is run through other companies in parts of Asia, rather than through Yahoo directly.

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