Microsoft and Yahoo: You Lost to Google, So Get Over It

Microsoft should abandon its bid to buy Yahoo’s search business. If the companies wanted to join forces, the time was five years ago. Today, an acquisition would at best soften the blow inflicted by a battle both companies lost to Google. At this point, Yahoo and Microsoft should tailor their strategies to compete in the next wave of the Web, where the focus will be social technologies and identity management, not search.

(In case you missed it, acquisition speculation resurfaced today when Microsoft CEO Steve Ballmer talked about the favorable economics of a Yahoo deal.)

Both companies should give Google credit and move on to other matters. At the beginning of this decade, Google’s founders realized that the true battle of computing for that era would be not in selling overpriced software (Microsoft) or building a new media company using old media business models (Yahoo), but rather in organizing information via search, and serving up simple, yet effective, text-based ads to make money. Lots of money.

We see the results of this strategy today. In the U.S. last month, Google claimed 72 percent of Web searches, according to Hitwise. And it’s like that now every month, every year.

But I doubt very much that Google wants to reminisce about history. Smart companies look forward. Now that Google solved the problem of how to search quickly through information, the next challenge rests in how best to connect the people behind that information. Right now, Google is losing that battle to Facebook.

Like Google has with its recent products, Microsoft and Yahoo should think about how it wants to compete in building technologies that make the Web more social. Google, for its part, has tried to compete with Facebook by getting the rest of the Web to gang up on it. It started with OpenSocial, a technology that lets developers build applications and have them work on several social networks (other than Facebook). Then it launched Google Friend Connect, a single-sign on technology that allows you to easily take your identity around the Web using your user name and passwords from familiar services, such as Gmail or Twitter (but again, not Facebook).

Of course, for Google, there’s a couple fundamental problems. Many social networking app builders will say they prefer the Facebook Platform. It helps them get their app in front of the myriad eyeballs and distribution channels that only the world’s most prominent social network can provide. These small app companies also derive the majority of their revenue from Facebook. Websites have also been bullish on Facebook Connect, which, aside from providing single sign on and an easy way to skip registration at websites, allows you to take your Facebook friends everywhere on the Web while maintaining your chosen privacy settings.

So while Google lags (at least in perception) behind Facebook, it’s trying to address the challenge Facebook will create for other internet companies in this next iteration of the Web.

Then there’s Yahoo and Microsoft.

Yahoo has made some strides by acquiring social-based companies ( Delicious, a social bookmarking service, and Flickr, a picture sharing service). It also recently launched a single sign-on technology, Yahoo Updates, which makes it easy to comment on other websites’ content using your Yahoo account. But I wouldn’t call any of those products a formalized social technology strategy. As for Microsoft, it bought that one percent of Facebook we all like to talk about so much. And SharePoint has some wikis from what I hear.

The biggest mistake for both Yahoo and Microsoft might be similar. Perhaps Yahoo should have offered Facebook founder Mark Zuckerberg $2-3 billion instead of $1 billion. Maybe Microsoft should have bought Yahoo in 2001 when its stock traded as low as four bucks, or at least invested in search more aggressively back when they had a chance.

An acquisition would give Microsoft eyeballs (and some money) in the short term. But as it relates to search, buying Yahoo’s search business would be too little, too late. They shouldn’t buy a company to compete in Web 1.0, a fight they lost, while letting Web 2.0 and the social technology boom completely pass them by. If it hasn’t already.