Tech Features

Microsoft-Yahoo!: Why the takeover makes sense

Feb 1, 2008, 15:34 GMT

A view of a billboard for Yahoo Inc. under a news ticker in Times Square in New York, New York, USA, on 01 February 2008. The Microsoft Corporation is attempting to purchase Yahoo Inc. with an unsolicited takeover offer of $44.6 billion (USD). EPA/JUSTIN LANE

Washington - Microsoft's move to buy Internet mainstay Yahoo! today shocked many around the world. But dig a little deeper into the competitive landscape of major software companies, and the bigger surprise is that the deal didn't happen sooner. Here's why.

There are two major players in the software industry today: Microsoft and Google. The first, of course, made its name by providing software to the world at a time when the personal computer was on the rise. Microsoft's products, thanks to its disk operating system (DOS) and later to Windows and Office, found its products on well over 90 per cent of the world's personal computers by the early 90s.

But the Internet happened, and by Microsoft founder Bill Gates' own admission, the company was caught off-guard, focusing its attention, instead, on the developing world of proprietary online services. 'We were optimistic about online services,' Gates said in a 1996 interview, 'but it was disappointing.'

And by that time, Microsoft was playing catch-up. The number one Web browser of the time was Netscape Navigator.

'Microsoft is a distant, distant number two,' Gates said at the time. So Microsoft did what Microsoft does best: focused its attention on building software applications that could browse the Web better and leverage what the Internet had to offer its more traditional office software.

Meanwhile, the major players in the Internet world continued building what was to really matter in the years ahead: Internet-based services and portals.

Yahoo! was the best known pure-play Internet presence of the time. The company had made a name for itself as the number one Internet Web portal and search engine. As the popularity of the Internet skyrocketed, so, too, did Yahoo's stock price, which enabled Yahoo! to forge boldly ahead with innovative Web ventures.

Yahoo! was making one thing clear: increasingly, it was possible and even desirable for computer users to accomplish a lot of what they needed to do on the Internet. Microsoft was as close as it has ever been to panicked.

And then along came Google. The search engine that began as a research project of two Stanford University graduate students was remarkable at the time for two reasons: its search capabilities were very effective, and its spartan interface was a welcome relief from the bloated Web portals that were popular at the time.

One by one, computer users around the world started setting their home page to Google, forsaking even Yahoo!, and the little company that was once just a blip on everyone's radar screen vaulted to the number-one most-heavily-visited Web site in the space of a few short years.

By 2002, with the dot-com crash still fresh in the minds of anyone with exposure to the world of technology, the challenge among Internet companies was not only build better online experiences for users but also to prove that the Internet could be profitable.

Google leveraged its meteoric success as a search engine by attracting the top minds in the industry. And over the next years, the company rolled out a series of initiatives that combined cutting- edge Internet-based software ventures with an advertising model that was both palatable to Internet users and tremendously profitable for Google itself.

Google's success reduced both Microsoft and Yahoo! to second-level players when it came to Internet innovation.

In recent years, these two once-dominant companies were not just looking over their shoulders at Google but racing to catch up - and in many ways imitate - the success of Google initiatives, which included everything from the spartan simplicity of the main search page to the wildly popular and lucrative adsense advertising model.

Microsoft's Internet-based initiatives keep it in the game but are a threat to no one's dominance. Yahoo! has tried but failed to emulate Google's successful advertising initiatives, and the result is that Yahoo! is seeing its share price - and its prospects - diminish by the day.

Google's success has made it clear to everyone where the momentum in the technology industry is today. And Microsoft has clearly decided that its best chance for being a meaningful part of that momentum is to combine its software engineering savvy with Yahoo!'s online experience and assets.

Microsoft comes in to buy Yahoo! at a time when Yahoo's share price is almost 60 per cent off its recent highs, and Microsoft's offer of over 44 billion dollars for the Internet giant represents at once an attractive premium for Yahoo! shareholders and a compelling value for Microsoft itself.

The deal is a win for both Microsoft and Yahoo!, and it will change the Internet landscape, giving Google a serious competitor at a time when it seemed that its lead in all things Internet was unassailable.