Microsoft: Eying Up Google’s Online Dollar

Microsoft’s unsolicited (and somewhat generous) bid of $44.6 billion for Yahoo! has stirred-up a hornet’s nest of protest from rival Google, which says it will seek to block any deal on antitrust grounds. The ferocious, all-out nature of Microsoft’s bid for Yahoo! clearly indicates that there is much more at stake here than technological prowess: the advertising dollar.

Unlike today’s corporate IT world, web consumers are able to move their ‘allegiance’ whenever the mood takes them, unless, that is, you have them bound to a social network of friends and family – hence Microsoft’s $240 million minority stake in Facebook back in November 2007. Thus, if the deal goes ahead, Microsoft might just have what it needs (Instant Messaging, social networking, gaming, user-generated content, etc.) to corral a significant proportion of the web population and to then funnel this vast community past its lucrative advertising hoardings.

Whichever way one looks at it, from a commercial perspective the web is very much a numbers game, and so with Google’s business growing at a phenomenal rate Microsoft needed to act fast to stay in the race. Looking at Microsoft’s traditional revenue streams of Windows and Office, one can see how the Yahoo! acquisition might bolster Microsoft’s Office Live strategy by driving traffic towards its online services. Although rankings vary from country to country, the Yahoo! website has consistently been the number one destination on the web according to Alexa, with MSN dipping to fifth place as Microsoft redirects traffic to live.com.

Microsoft of course wants to preserve its dominance of the personal productivity tools arena, and so it must lure as many consumers as possible to its online offerings. Google’s own offerings in this space are still poor imitations of traditional PC applications, but one only has to look at projects such as Adobe’s Buzzword and Premier Express to see how things could evolve over the next couple of years.

A Microsoft/Yahoo! tie-up would obviously have an impact on Google’s online search and advertising business, and so Google is undoubtedly going to fight tooth-and-nail on this one. But while the US anti-trust authorities may approve the acquisition, there is a strong consensus that the EU might block it.

The EU anti-trust brigade appears to be far more wary than its US counterpart, especially where Microsoft and Google are concerned. For example, the US immediately approved Google’s purchase of DoubleClick, but the EU has reportedly prepared a statement of objection, although it has not yet blocked the move. Also, of course, the EU has taken a very strict line with Microsoft in recent times, e.g. the long running Windows/Internet Explorer saga and more recently, Windows Media Player. So, if the EU wants to find an objection to the deal, then it isn’t going to be all that difficult, and any prolonged investigation could seriously scupper Microsoft’s plans.

Looking at the deal from a purely financial perspective, Microsoft currently has enough cash in the bank to buy Yahoo! outright, but the company has decided to fund part of the deal with debt. This suggests that further acquisitions might not be too far away, or that Microsoft does not want to blow its entire war-chest on this one deal.

If the deal goes through, Microsoft will be paying a 62% premium for Yahoo!, and this has led some commentators to suggest that the company is digging its own grave. But with global internet advertising predicted to top $40 billion this year, and $80 billion within three years, this is a big-bet game for Microsoft. To put this into perspective, Microsoft’s total group sales for 2007 were $51 billion, compared to Google’s $17 billion and Yahoo!’s $7 billion.

The rapidly changing online landscape, which is having an increasing impact on enterprise IT, has exposed a weakness in Microsoft’s business, as despite heavy investment over an extended period of time, the company has not succeeded in dominating the internet in the same way it did the personal computing arena. Google’s continued success has forced Microsoft into taking this bold step in order to maintain its position. If the company gets it right then there is the potential to compete strongly with Google; however, if the acquisition turns into a tortuous game of piggy-in-the-middle, then Microsoft could find itself in a rather perilous position, a situation that few in the IT industry will ever have contemplated.

Source: OpinionWire by Butler Group (www.butlergroup.com)