In-Depth

Can MicroHoo Take On Google?

The time may be right for Redmond's acquisition, but there are planty of obstacles littering the road to a smooth technical merging of Microsoft and Yahoo.

• By Ed Scannell and Jeffrey Schwartz
• 03/01/2008

But one thing is clear from the outset: Redmond is pulling out all the stops to narrow the gap between itself and archrival Google, Inc. How effective a Microsoft-Yahoo marriage ultimately could be in positioning the combined company to be more competitive with Google -- particularly in the area of next generation IT applications and services -- remains an open question.  But clearly Microsoft has decided now is the time.

 "Google poses a clear long-term threat to Microsoft's business," says David Mitchell, Ovum's senior vice president in charge of IT research, consultants based in London. "But Microsoft and Yahoo together would make a significant competitor who could fight back."

While this is unmistakably a move to thwart further gains by Google in search, advertising, portal, and online consumer services, Microsoft's stake in the ground will consequently set the agenda for all its core enterprise software businesses. Bringing Yahoo into the fold -- or failure to do so -- could also reshape how Microsoft sets to define its "cloud" initiative and plan to evolve into a "software-plus-services" player.

"They decided in the mid 1990s that the Internet was imperative for them but they have never really acted like it has been an imperative, " says Jeffrey McManus, principal of San Francisco consulting firm Platform Associates and a former director of Yahoo's developer network from 2005-2006. "By writing this giant check to purchase Yahoo and basically draining their corporate coffers, it will become a serious bet-the-company proposition."

So what does the proposed Yahoo acquisition mean to Microsoft's $51.1 billion core Windows business, particularly its Windows and Office Live initiatives?

"It really represents a transformation of our business, the Windows user wants to be live," Ballmer said on the February 1st call announcing Microsoft's bid. "The Windows experience will increasingly embrace the Internet. There will be a Windows Live. There will be an Office Live as we continue to bring out innovations in which Office transforms, and is transformed by the Internet."

But does Microsoft need to fork over an unprecedented $44.6 billion to succeed in the online world in order to catch up with Google?

"Microsoft's big problem is they have this unfocused desire to create successful Web properties, but they've never really done that," says McManus, an expert in deploying key Microsoft technologies including the .NET Framework, Visual Basic and C#. "They just don't have it in their DNA to do that. At the end of the day, it's the kind of thing where if buying Yahoo finally gets Microsoft serious about doing interesting things on the Internet, more power to them."

Perhaps a more pressing question remains: What does a $44.6 billion investment in a Web-based, open source driven company do to Microsoft's long-held core mission of Windows Everywhere?

"The integration between these two companies is going to be one of the more massive projects in modern business history," predicts Michael Gartenberg, an analyst at New York-based Jupiterresearch.

"If this deal goes through Microsoft becomes the owner of one of the largest distributed open source data center complexes in the world," says Dana Gardner, principal analyst with InterArbor Solutions, Inc. in Gilford, N.H. "That is unbelievable irony."

Some analyst have asked what if, and its big if, Microsoft commits to supporting both Windows and open sources products and strategies equally -- perhaps tying both environments together via an extended Web services initiative --what problems does this present corporate customers that have sunk tens of millions into Windows-based products?

"If they are willing to bet this much money on a Web services, search-advertising-infrastructure play based on open source efficiencies, why wouldn't their larger enterprises want to make the same bet?," Gardner points out. "This not only changes Microsoft's thinking about what sort of company it wants to be but its largest IT customers do too. The entire philosophy of the company [Microsoft] is up for grabs with this."

Consider Yahoo's key data management platform that runs key sites such as the heavily trafficked Yahoo Finance and its photo sharing site Flickr are run on the open source MySQL, which ironically Sun Microsystems has agreed to acquire for $1 billion. And the server side scripting language that embodies Yahoo's sites are based on PHP.

"If Microsoft wants to pull out their checkbook and throw hundreds of engineers at migrating Yahoo Finance to SQL Server, that's their prerogative," McManus says, adding he couldn't imagine any other company doing that.

When Microsoft acquired Hotmail, it actually did migrate the platform from Unix to Windows. Will Redmond do the same with Yahoo?

Analysts point out that that took many years and was not a pleasant experience. The scale of Yahoo, and all its PHP code and all of the dispersed MySQL and FreeBSD servers, would be an order of magnitude more complex. "It seems to me like it would be crazy to take an existing code base and migrate it to another one," McManus says. It will be telling, observers concur, on how Microsoft addresses such issues.

Would such an acquisition hasten the delivery of new and important Web-based products to market as well as improve their quality, important factors in the war each company wages against archrival Google?

"Yahoo has been very much on the cutting edge relative to Web 2.0 technologies, relative to things like social networking and other things in those areas," says Gartenberg. "The addition of Microsoft engineering capability into Yahoo should allow the combined company to bring new products and services to market more quickly, something that Yahoo has notably struggled with."

Can a beefed up online services portfolio from Yahoo allow Microsoft to counterpunch whatever attack Google mounts on its core desktop applications?

"Microsoft's desire is to protect the solid revenue and margin contributions coming from Office, says Ovum's Mitchell. Google Applications have yet to make a real dent in the Microsoft Office giant, but they do pose a long-term threat. The online engineering capabilities Yahoo has will undoubtedly offer Microsoft the potential to bring new services to market," he said.

Even if Google Applications ultimately gain traction, if Microsoft shifts to a similar model, what does that mean for its traditional applications business?

Ballmer told analysts at a briefing in New York February 4 that he is aware that some of the new business models of its "cloud" initiative and, by extension, Yahoo might cannibalize established, profitable businesses utilized by both consumer and enterprise customers.

"If somebody is going to cannibalize us, better that it be ourselves, and a lot of it I think is net new opportunity to add value to our customers; therefore, net new opportunity to generate real margin," Ballmer told analysts.

"A combination of Yahoo and Microsoft will enable us to deliver a broad range of new experiences to our customers that neither of us would have achieved on our own," said Microsoft chief software architect Ray Ozzie on the February 1 call.

Overlooked in terms of its strategic importance to the proposed deal is Zimbra, Inc., a startup Yahoo acquired in September 2007 that specializes in server and client collaboration software including e-mail and group calendars.  How might Microsoft use Zimbra, the open source question not withstanding?

"Microsoft has been weak on collaboration in the traditional markets compared to IBM-Lotus, says Dwight Davis, a senior analyst at Summit Strategies. "It has made some progress with SharePoint but even in moving to the Web 2.0/Enterprise 2.0 world with social networking, Microsoft is still behind IBM."

Conversely, Yahoo is interested in reaching out towards the rich clients like AJAX enablement whereas Microsoft is coming from the fat client side but also moving towards the rich client side with Silverlight, Gardner adds. "Zimbra sits in the middle between the Yahoo heritage and the Microsoft heritage," he says. "It could be an interesting way for Microsoft to enter more rich application activities."

Some see internal enterprise search engines as an untapped opportunity. So what does Yahoo bring to extend Microsoft's efforts in enterprise search?

Google has a lead in enterprise search over Yahoo, says Greg Shields, an independent consultant in Denver, Colo. "Microsoft's last wave with Vista was all about search, though that theme has dissolved a bit with the lackluster adoption of Vista," Shields says. "With ‘trying to find documents' consuming something like 25 percent of enterprise employee time at present, e-search is a valuable market that is only now being truly identified and fulfilled."

Microsoft also points out its proposed acquisition of FAST Search and Technology will further help it gain a foothold in enterprise search.

One possible benefit to Microsoft would be gaining Yahoo's extensive network of data centers that could play a significant role in Redmond's next generation cloud computing strategy. Is that a key that Microsoft couldn't build continue building itself?

"Not that there isn't some benefit to be derived from this, but it strikes me as being a minor part of this deal," says Will Zachmann, president of Canopus Research in Duxbury, Ma. "Besides I think paying almost $50 billion for a data center is a lot," he says.

On the issue of federated directories, Yahoo and Microsoft have distinctly different approaches to identity management. How might that play out?

McManus points out that Yahoo's support of OpenID 2 gives it a huge edge in providing federated identity management that potentially could extend to Microsoft's CardSpaces effort and Active Directory.

"Their specific implementation will enable anyone to login to any Web site using a single click," says McManus, who says he worked on Yahoo's OpenID efforts during his tenure there. "You login with My Yahoo account and that's revolutionary and neat."

What sort of corporate culture clashes will arise between a crunchy silicon valley-based company and a eat-beer cans-for-breakfast software developer?

"Where the corporate cultures are most at odds is that Yahoo is much more a media company than it is a software development organization," Gardner says. "It has developers and builds infrastructure and has created a lot of Web properties but it is fundamentally a media company. There is a very different culture around how to monetize around advertising and media vs. how to monetize around licensing software. So it is not just a cultural dissonance, it is a dissonance of business models."

Given a range of unknowns that could come into play over the coming weeks and months, what are the chances Microsoft will ultimately succeed in acquiring Yahoo?

"I think there are more reasons for it to happen than not to happen," says Gartner analyst David Smith. "It's being driven by market forces and by the realities of competition and neither one has been able to compete with Google by themselves in these markets."

And if it doesn't happen?

While Ballmer believes Microsoft will succeed, he told analysts that it will continue to invest in building out its online services. "We think we have a chance to get farther sooner through the acquisition of Yahoo," he admitted. "We'll stay on that path regardless."