[tt] NYT: Yahoo Offer Is Strategy Shift for Microsoft

[Premise Checker]

Bill Gates, the chairman of Microsoft and a global philanthropist,
called upon fellow business leaders at the World Economic Forum last
week to pursue a kinder form of capitalism.

Yahoo Offer Is Strategy Shift for Microsoft
New York Times, 8.2.2 (our 40th wedding anniversary)
http://www.nytimes.com/2008/02/02/technology/02soft.html

By STEVE LOHR

Bill Gates, the chairman of Microsoft and a global philanthropist,
called upon fellow business leaders at the World Economic Forum last
week to pursue a kinder form of capitalism.

But on Friday, the brand of capitalism practiced by his company's
chief executive, Steven A. Ballmer, came with a decidedly hard edge.

Microsoft's $44.6 billion bid for Yahoo, pushed by Mr. Ballmer, was
hostile. And during a conference call Friday with analysts and in a
subsequent interview, he never once uttered the word "Google,"
referring to the Internet search giant that has humbled Microsoft
only as "the leader" in the online world.

Mr. Ballmer, 51, is a famously fierce competitor. To him, failure is
never an option. "If we don't get it right at first, we'll just keep
coming and coming and coming and coming," he said in an earlier
interview.

Microsoft's bid for Yahoo is thus a tacit, and difficult, admission
that the company did not get its online business right. The bid also
represents a sharp departure from Microsoft's well-thumbed playbook
of building new businesses on its own. In the past, when Microsoft
moved beyond its stronghold in desktop computer software -- and into
areas like video games and data-center software -- it has done so
mainly with in-house investment, patience and tenacity.

Microsoft stuck to that formula for years with its Internet search
and advertising -- without success. It did buy an online ad agency,
aQuantive, last May for $6 billion, a sizable move given Microsoft's
tradition of making small, niche-filling acquisitions.

The losses, however, continue to mount in Microsoft's online
business, while Google makes billions in profit.

The Google challenge to Microsoft extends beyond online search and
advertising. Google is at the forefront of companies offering
software as online services, including Web-based alternatives to
Microsoft's lucrative desktop products like word processing,
spreadsheets and presentation programs.

Mr. Gates, Microsoft's largest shareholder, has said that Google is
the company that most reminds him of Microsoft in terms of its broad
ambitions and demanding corporate culture. Mr. Gates, who is
spending more time on philanthropy these days, blessed the Yahoo
bid, but it is Mr. Ballmer's brainchild.

And Mr. Ballmer clearly views the Yahoo bid, and the Google threat,
in broad terms. A Yahoo deal, he said, would represent "the next
major milestone in Microsoft's transformation."

Microsoft, too, is moving to offer more software features as
Web-based services, though it sees a future that revolves around
both personal computer software and online services.

Microsoft has been forced to adopt a new strategy for a different
kind of threat than it has confronted, and usually dispatched, in
the past.

"This shows just how worried Microsoft is by Google," said David B.
Yoffie, a professor at the Harvard Business School. "Microsoft has
faced competitive threats before, but none with the size, strength,
profitability and momentum of Google."

In the conference call, Mr. Ballmer conceded that Microsoft needed a
big move to try to catch up in the online business. "The market
continues to grow, and the leader continues to consolidate
position," he said.

Microsoft, analysts say, finds itself in a battle where improving
its search algorithms and online ad software is not going to be
enough. Google has impressive technology, to be sure, but it also
enjoys the torrid growth that falls to the leader in highly
networked businesses like Internet search and ads.

Google's edge in search traffic then attracts more advertisers and
Web publishers, so there are more ads in Google's auctions, which
makes them more efficient. Each advantage reinforces the other, in
what economists call "network effects."

One measure of the network advantage, analysts estimate, is that
Google collects 40 percent to 100 percent more revenue per search
than either Yahoo or Microsoft.

Microsoft, of course, is no stranger to the power of network
effects. It was the master of that strategy in the personal computer
era. Its early lead in PC operating systems, and its efforts to
encourage independent software developers to write applications for
Windows, paved the way for Microsoft's dominance.

More programs ran on Windows than on any other operating system, so
more users bought PCs running Windows. Apple, by contrast, never
built up the developer network as Microsoft did.

In the Internet era, network effects are working against Microsoft
as it battles Google.

With the Yahoo bid, analysts say, Microsoft is trying to buy a big
enough share of the market to be a credible alternative to Google
with online advertisers.

In the most recent quarter, Microsoft had online revenue of $863
million, compared with $4.8 billion at Google. Yahoo and Microsoft
together had more than $2.6 billion in revenue, still trailing well
behind Google but in a far stronger competitive position.

But the trends in online advertising are working to Google's
advantage as it continues to gain share. The more Google's momentum
accelerates, the more difficult it will be for Microsoft to catch
up, no matter how much it might improve its search technology.

While $44.6 billion is a hefty price tag, many analysts say it will
be worth it if Microsoft can close the gap with Google. On Wall
Street, Microsoft suffers from the perception that it is several
steps behind in the march toward the Internet future.

Microsoft, analysts note, has grown solidly for years, but investors
give it little credit. Its stock price has long been stagnant,
despite the company's extremely profitable businesses. The Office
division alone had quarterly revenue of $4.8 billion -- equal to
Google -- and an astronomical $3.2 billion in operating profits. The
Windows unit is even more profitable.

"Microsoft needs to show that it is going to make the online
business work, and this is about shaking things up that needed
shaking up," said Charles di Bona, an analyst for Sanford C.
Bernstein & Company.

Asked whether the move amounted to an admission of failure of the
company's earlier strategy, Mr. Ballmer replied that some people
might take that view.

"But I made the judgment that for the long-term health of this
company, and for the long-term interests of our shareholders, that
acquiring Yahoo is a good thing," he said.