Skip to content
Join our Newsletter

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.

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.

The key will be to synchronize these products so web and map searches draw attention to their advertisers, and to be the company that offers a single source solution for all their customers’ online needs.

Hopefully it’s not too little and too late.

Google has not been resting on its laurels. Currently Google is developing its own phone, an operating platform and software suite for cell phones, and is reportedly bidding to control the 700 MegaHerz telecommunications spectrum —formerly known as Ultra High Frequency or UHF. Television broadcasters don’t use this frequency much anymore, but it’s a powerful signal with a longer range than conventional cell phone technology. It is expected that the 700 Mhz frequency auction planned by the U.S. Federal Communications Commission will raise between $10 and $30 billion.

Google also released a suite of free online software programs in the last few years that compete directly with Microsoft Office. The programs are not as powerful as Office, but again, they’re free, they allow you to access your files from anywhere, and they’re getting better all the time as Google is constantly working to add features and functions. I actually prefer Google Spreadsheets to Excel for keeping my monthly budget, and like that I can access those files from anywhere I can get the internet.

If Microsoft’s bid is successful, and there’s no reason to think it won’t be, the online world will be effectively reduced to just two major players by the end of the year. Although there are a few other companies in the mix that offer one piece of the puzzle — Mozilla, Opera, MapQuest, AOL, Amazon, eBay, Dogpile — you pretty much have to go through Google or Microsoft to get the full spectrum of online services. Virtually everything you do online will go through either Google or Microsoft at some point.

In a way it’s a sad day. Once upon a time the web was the Wild West, a place where startup companies could compete on equal footing with giants and come out on top. I worry that the almost total merger of industry players could stifle innovation, as Microsoft and Google compete to snap up all the good ideas and talented inventors before they can ever rise to the point where they could become competitors.

It’s also an interesting time for Microsoft shareholders — a happy time for the investors that were encouraging Microsoft to use their cash reserves to expand and buy up profitable companies, and a sad time for investors that have been complaining for years that Microsoft hasn’t used their reserves to pay out larger dividends.

Follow all the details of technology’s biggest buyout online at www.forbes.com, www.arstechnica.com, or wherever you go for business news.