Microsoft, Yahoo and Google

Maybe Bill Gates stepped back from the top post at Microsoft a little too soon. Or maybe CEO Steve Ballmer sees something the rest of us don’t. How else can you explain Microsoft bidding approximately $44 billion for Yahoo this past week?

That’s $44 billion for a company that earned less than $7 billion total in 2007 before taxes, payroll for 11,400 employees, and all other expenses, which left about $660 million in profit. Yahoo’s declining value over the years has also cost shareholders about $35 billion since 2005.

Maybe Microsoft, with some of the largest cash reserves of any company in existence (about $50 billion, depending on the day), figured that $44 billion is a bargain price for a company that was once valued at close to double that on the stock market. Maybe, by leveraging Yahoo’s customer base, it figured both companies will come out stronger.

And maybe, just maybe, Microsoft is a little more worried about Google than it’s let on.

The biggest misconception out there is that Microsoft’s natural competitors are Apple and Linux, but Apple customers still overwhelmingly buy Microsoft products like Office, and Linux users are still in the minority. And while Apple’s market share is expected to double in the next few years, that still only gives the company about 12 per cent of the total global market for home and business computers.

But the sale of computers and operating systems are only part of the equation. Control of the online world, which all computers use, is far more important to secure the future.

Microsoft clearly wants a bigger piece of online advertising revenues and sales, and the huge number of people that use Hotmail, Messenger, Explorer and other company products. However, Microsoft’s web search tool is a distant third behind Google (about 56 per cent of the search market), and Yahoo (about 17.7 per cent). Web searches are where companies can really cash in by tailoring display ads to match your web search terms.

By purchasing Yahoo, Microsoft would have about 30 per cent of the search market, and would be more competitive in reaching the other 14 per cent not currently loyal to Google. With a good enough product and experience they could even take the lead.

With the advent of web-enabled phones, the company with the best suite of services available will be also able to sway a good chunk of consumers their way. Yahoo and Microsoft already have complementary programs, including webmail, text messaging, map searches, and news services. Microsoft has a fledgling partnership with Facebook that has a lot of potential. Yahoo brings to the table the Flickr online photo service, Yahoo Mobile, and a partnership with eBay.


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