Addition of Yahoo Could Help Microsoft Improve Web-Based Software Offerings

At the surface, Microsoft’s $44 billion offer to buy Yahoo centers around the company’s need to compete for market share with Google in the online advertising space. But by combining Yahoo’s expertise for creating Web-based applications with Microsoft’s specialty in enterprise software, analysts are speculating whether or not the two companies could come up with an alternative to Google Apps and other software-as-a-service (SaaS) applications.

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Microsoft’s official statement about the purchase offer hinted at a broader motivation for the deal. “Our lives, our businesses and even our society have been progressively transformed by the Web,” Ray Ozzie, chief software architect at Microsoft, said in the statement. “The combination of these two great teams would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own.”

But before Microsoft proceeds with any plans for online application development with an acquisition like Yahoo, it still has to acknowledge that SaaS represents the future of software delivery, says Nick Patience, managing analyst at the 451 Group. “Microsoft doesn’t seem entirely convinced of SaaS yet,” he says.

Microsoft’s embrace of the SaaS delivery model has been sluggish because it wants to avoid cannibalizing one of its core businesses—installed enterprise software, says Roger Kay, president of Endpoint Technologies. “A lot of this conflicts with their main business,” he says. “It’s left Microsoft unable to really make a big push in the Web 2.0 world, while Google doesn’t have to defend a main franchise.”

Yahoo has also struggled to get into the enterprise software space as it failed to come up with an alternative to Google Apps, the integrated suite of Web-based e-mail, calendaring, documents and spreadsheets, of which Google added an enterprise version, says Patience. “While Yahoo is a Web company, they haven’t been in the SaaS game very much,” he says. “It’s curious to see why they never added a [Google Apps] alternative.”

An acquisition by Microsoft could also reinvigorate Yahoo’s engineers, who have seen many of their colleagues leave due to the company’s lagging performance, Patience adds.

Rebecca Wettemann, a vice president and analyst for Nucleus Research, says that Microsoft should look at what Yahoo has been working on in the social software space and see if it could be tailored to the enteprise. Yahoo’s acquisitions of companies such as the file-sharing site Flickr and the social bookmarking site del.icio.us could give the new company a point of reference in the consumer space in which to tailor an enterprise social network.

“Enterprise social networks seem like a great place for them to drive some research and development,” she says. “It could be an opportunity for Yahoo to breathe some new life into its online product lines.”

Meanwhile, in the short term, one of the main areas where Yahoo and Microsoft might join forces right away is delivering Web-based applications (and monetizing them with ads) in the mobile space, says David Mitchell Smith, a Gartner analyst. “Everybody is scrambling for the advertising in a new area, and mobile’s a big one,” he says.

To deliver Web-based applications together, however, Kay says the two companies would have to join forces very quickly before they lose any more ground. “To be successful with that kind of R&D, they’d have to integrate very fast.”