Page last updated at 09:42 GMT, Sunday, 4 May 2008 10:42 UK

Analysis: Microsoft without Yahoo

By Tim Weber
Business editor, BBC News website

So who is the loser then, now that Microsoft has withdrawn its takeover bid for rival Yahoo?

On the face of it, both companies are. After all, who can tackle the Google behemoth bestriding the world wide web?

Steve Ballmer and Jerry Yang
Steve Ballmer and Jerry Yang both face the Google challenge

However, that assumes that the combination of Microsoft's and Yahoo's DNA would have created a top athlete, not a corporate Frankenstein.

Microsoft chief executive Steve Ballmer may beg to differ, but it was far from certain that the combination of two not-quite-that-successful teams of web engineers would have resulted in a credible challenger for Google.

Take Yahoo's most recent technical failure, called Panama. This advertising platform was supposed to match up search results with appropriate advertising.

"There's nothing in Panama that I would want to integrate with our offering," a senior Microsoft executive told me last week.

Buying eyeballs

Ultimately, Microsoft's bid for Yahoo was probably not about technology, but eyeballs - the term used by advertising executives to describe a website's number of users.

Despite all its troubles, Yahoo still commands a lead in the all-important US web market, and it has a healthy market share in many countries around the world.

As Microsoft had difficulties growing its global web reach organically, buying eyeballs - or market share - through the acquisition of Yahoo was the obvious solution.

Now Mr Ballmer has to come up with a Plan B.

Connecting the dots

Once again, the solution comes from the Department of the Bleeding Obvious, but is worth repeating nonetheless.

Microsoft is big on the web because it can shepherd audiences straight from its Windows operating system to its Internet Explorer browser, its Live Messenger and all its web properties.

The problem is that Microsoft's web offering has always been less than compelling. And as a result Microsoft has been fraying at the edges, losing both users and revenue to the likes of Google.

At Yahoo, champagne corks will be popping as it has escaped the clutches of Microsoft

In the long-term these losses are not sustainable for Microsoft, especially as web-based applications are getting better and command ever more eyeballs.

To staunch the haemorrhaging of users, Microsoft has to make its web offering not only more compelling, but much more integrated.

Google for its part has managed to link up its disparate suite of web tools in a nicely integrated offering. Getting from Gmail to Google Docs to Google Maps to Google search to Google reader or even Google Earth requires just a click or two.

Now Microsoft has to do the same. One Microsoft executive calls its "connecting our own dots".

Already Microsoft's "Live" offering of search, maps and other tools is beginning to resemble and in some ways - for example video search - even excels the Google proposition.

It is still done in a very old-school Microsoft way, and creaking and jarring in many places. Travelling the Microsoft Live universe gives users a feel for the rivalries between the many competing teams within Microsoft.

Buying in expertise

But instead of waiting for another big deal like buying Yahoo, expect to see Microsoft going on a buying spree for many small Web 2.0 companies.

This would not be a sign of weakness. Remember, some of Google's best offerings are the fruit of such small acquisitions.

Microsoft founder Bill Gates will end his day-to-day involvement with the company this summer.

The firm's new leadership will have to prove that it can deliver a web offering that is integrated, profitable, and can ultimately substitute the profits generated by Microsoft's top two cash cows Windows and Office.

After all, what is it that Google's clever engineers can do that Microsoft's equally clever engineers can't?

Maybe it has something to do with the corporate mindset - and the lack of focus in Microsoft's sprawling empire.


At Yahoo meanwhile, champagne corks will be popping as it has escaped the clutches of Microsoft. The next day, though, will see Yahoo wake up with an almighty hangover.

Yahoo founder Jerry Yang promised shareholders and staff that "with the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history".

Fat chance of that.

Mr Yang and his top managers will be mightily distracted by the need to chase revenue-generating deals with the likes of Google and AOL. Even more worryingly, they have to brace themselves for a deluge of lawsuits from angry shareholders who have lost out big time.

And if Yahoo's techies were worried about falling under the leaden grip of Microsoft management, they will soon have to swallow even harder when their solutions are discarded to make way for the tried and tested offering from Google. Already Yahoo has run tests to replace its paid search system with that from Google.

Yahoo likes to write its name with an exclamation mark at the end - "Yahoo!".

This might be the right time to update the branding: How about "Yahoo?".

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