Microsoft’s Bid for Yahoo: The Battle for Online Superiority Gets Serious

As the takeover war of Yahoo by Microsoftcontinues to rage, one thing is clear: The battle for superiority in online advertising and online services just got more serious. Yahoo is the second-largest global online network of integrated services, with more than 500 million users worldwide. Microsoft is the world’s largest software company, with more than $51 billion in annual revenues and an estimated 90 percent share of the desktop market. This has all the makings of creating a new powerhouse in the technology market, with far-reaching implications for both the enterprise and consumers. It is also fraught with high risks.

The rivalry between Microsoft and Google has been brewing for some time. For the most part it has been a well-mannered rivalry, with most of the shots from Google eliciting no apparent response from Microsoft. Google’s Web apps and Android mobile platform represent direct challenges to Microsoft Office and Microsoft’s mobile platform, respectively.

The move to buy Yahoo, Google’s closest search competitor, signals that Microsoft is, in fact, paying attention and has decided to get serious about this market with a full frontal assault on Google’s hallowed home turf.

The Microsoft/Google battle is multifaceted, encompassing not only search, enterprise applications and consumer offerings, but also the mobile arena. Take, for example, the recent Microsoft purchase of smartphone maker Danger for a reported $500 million. Danger makes the very popular Sidekick phone, available exclusively to T-Mobile. Danger’s former CEO and its top design team recently left the company to join Google, and they are behind Google’s Android project. While Google took the brain trust, Microsoft scooped up the technology. It is unclear at this point what Microsoft’s plans are for the Sidekick but it is possible the phone could be combined with Microsoft’s Zune media player to create an all-in-one phone that could challenge the popular Apple iPhone.

Microsoft’s typical strategy when entering a new technology market is to build its own product, then continue to improve on it while also tightly integrating it with its other popular products and services until it dominates the new market. For years, Microsoft has been attempting to build a dominant online search engine (MSN), with only moderate success. With the bid for Yahoo, Microsoft would acquire the second-biggest online portal and immediately gain vast expertise in online search and online advertising.

In the short term, it appears unlikely that Microsoft would shutter Yahoo in favor of its MSN property, or vice versa. However, eventually Microsoft would look to improve its MSN and Yahoo properties by either eliminating duplicate developer teams or combining the best elements from both to work on creating new services that will challenge Google and other competitors head-on.

What does this mean for Yahoo?

Well, the good news is that Yahoo will have the backing of the world’s leading software company, and there is a huge upside potential for cross-pollination with Microsoft’s enterprise technologies and combined content from both companies. With that mix, Yahoo could begin to seriously challenge Google as the top online portal destination.

The downside for Yahoo? Lots.

In terms of potential risks to Yahoo, a Microsoft deal most certainly represents a loss of control and means no longer guiding its own destiny. The fear that top talent, not wanting to become Microsoft drones, will begin to jump ship is a real concern as well. Image-wise, this offer immediately devalued Yahoo as a company. Before, it was the second-largest Web portal in the world, striving to be number one. Now, thanks to Microsoft and the counteroffer made by News Corp. (done to help “save” Yahoo), the moves have solidified the portal as an acquisition target.

It appears dissention among the ranks has already begun. Yahoo has been hit with seven separate lawsuits recently, brought by shareholders unhappy with the way it handled the Microsoft offer. The shareholders claim Yahoo is deliberately devaluing the company by turning down Microsoft’s offer and by implementing new measures, such as a new employee severance package, designed to make the takeover unattractive by driving up the asking price. In an annual report filed last month, Yahoo voiced its concerns that the Microsoft offer will prevent it from hiring top new talent and retaining the talent it already has in place. The new severance package includes clauses in which employees who are axed after a possible acquisition could receive up to two years’ pay.

On top of all this is a fear the merger may never be as successful as Microsoft hopes and the result could cause irreparable damage to the reputations of both Yahoo and Microsoft. One needs only to look at the Time Warner/AOL merger to see a prime example of how a big-time merger can go bad.

What does a “Yahoo-Soft” or “Micro-Hoo” deal mean?

While Google currently has an edge because of its Web search dominance, Micro-Hoo could actively compete with Google in services, such as maps, e-mail, instant messaging, e-commerce and music on demand. Both MSN’s Hotmail and Yahoo’s IM are popular services that have been used in enterprise environments.

For advertisers, the relationships won’t change that much because advertisers pay only when someone clicks on their ad. They will continue to advertise with either Yahoo or Google or any other search portal site based on the level of activity their ads get. If they see strong clickthroughs on their Google ads, they wouldn’t suddenly change strategy and go with Yahoo just because it offers a competing ad service. Any free new service created by Micro-Hoo will need to have an advertising component to be financially successful.

Google does offer some Web applications that are a direct competitor to Microsoft Office. However, these applications are limited in their abilities and lack offline support for collaboration. While Google Apps will attract renegades and individual users, enterprise customers continue to pay for and use Microsoft Office as the suite of choice. In addition, many enterprise customers are deploying SharePoint 2007, adding collaboration and content management to disparate Office users while providing an actual business reason for upgrading to Office 2007. As Microsoft continues to add collaborative tools and capabilities to the Office suite, it becomes increasingly difficult for corporations to consider an alternative.

History has shown us that innovation comes to a screeching halt in the absence of competition. It has also shown that Microsoft is at its most creative when it is threatened; its battle with Google may spark new online services that will help drive Web 2.0 innovations.

Successfully marketing social networking applications is the next big enigma that Microsoft, Yahoo and Google are all actively looking to solve. While social networking is all the rage right now, especially with companies hoping to harness it to promote collaboration among their workforces, no one has found a way to profit from it yet. With several new companies developing innovative search technologies and collaborative services, there will be a lot more competition out there for all three companies. Successfully finding a way to generate revenue from social networking will be the next milestone these three (soon to be two?) companies must reach if they want to retain their dominant positions in the online market.

Ken Anderson is an executive strategist with the Burton Group, a leading analyst firm that provides technical research and advisory resources, and information technology (IT) consulting services. Anderson’s former positions include director of global IT for Google and CIO for Novell’s worldwide information systems. He brings more than 16 years of experience in IT strategy and leadership helping global enterprise IT organizations align capabilities to support business objectives.