[tt] NYT: A Giant Bid That Shows How Tired the Giant Is

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Oh, how the mighty have fallen.

This may seem like an odd way to characterize a company that just
announced its willingness to plunk down $44.6 billion to make its
first hostile takeover ever. A company that will probably generate
somewhere around $60 billion in revenue when its fiscal year ends in
June. A company whose market share in its two core products is still
so high -- despite recent inroads by a certain flashy competitor --
that it qualifies as a monopoly.

A Giant Bid That Shows How Tired the Giant Is
New York Times, 8.2.2 (our 40th wedding anniversary)
http://www.nytimes.com/2008/02/02/technology/02nocera.html

By JOE NOCERA

Oh, how the mighty have fallen.

This may seem like an odd way to characterize a company that just
announced its willingness to plunk down $44.6 billion to make its
first hostile takeover ever. A company that will probably generate
somewhere around $60 billion in revenue when its fiscal year ends in
June. A company whose market share in its two core products is still
so high -- despite recent inroads by a certain flashy competitor --
that it qualifies as a monopoly.

But this is Microsoft we're talking about, and if its proposed
acquisition of Yahoo signals anything, it serves as a confirmation
that Microsoft's glory days are in the past. Having failed to
challenge Google where it matters most -- in online advertising --
it has been reduced to bulking up by buying Google's nearest but
still distant competitor. In many ways, the company has become
exactly what Bill Gates used to fear the most -- sluggish,
bureaucratic, slow to respond to new forms of competition -- just as
I.B.M. was when Microsoft convinced that era's tech behemoth to use
Microsoft's operating system in its new personal computer.

The I.B.M. PC was introduced in the summer of 1981. Here we are
nearly 27 years later, and Microsoft's core product is still its
operating system, now called Windows -- that and its suite of
applications, called Office, that run on Windows. They generate
billions of dollars annually for the company. The most recent
version of Windows, released almost exactly a year ago, has already
been installed in 100 million computers. Yet in technology, 27 years
is a lifetime, and there is a powerful sense that while it has spent
enormous effort over the years protecting its monopoly, the world
has passed it by. In particular, the technology world now centers on
the Internet, where Google reigns supreme, and Microsoft has never
succeeded in making serious inroads. Years ago, it started its own
online service, MSN. It has made efforts to develop a search engine
that could compete with Google's. It has developed an advertising
infrastructure to both place ads on other Web sites --another Google
specialty--and to generate its own ad revenues. In every case, it
has come up a day late and a dollar short. For instance, only 4
percent of Internet searches worldwide are done with Microsoft's
engine, compared with over 65 percent done with Google's.

"Of its five major divisions," said Brent Thill, the software
analyst for Citigroup, "the online division is the only one that
loses money. They are software engineers at Microsoft," he
continued, "and their DNA is very different from the DNA of someone
who builds online assets. It's just a different mind-set."

Besides, the old strategies that once worked so well for Microsoft
-- strategies that worked when the world still revolved around
Windows -- have no place in this new world. In the mid-1990s, when
Netscape posed a threat to Microsoft's hegemony, Microsoft created
its own competing browser, Internet Explorer, made it an integral
part of Windows, and used its desktop monopoly to fight back.
Eventually, Netscape was reduced to also-ran status -- and the
Justice Department took Microsoft to court on antitrust violations.

Today, Microsoft lacks both the weaponry and the nimbleness to
compete with Google. Its operating system monopoly gives it no
advantages in this battle. People can use Microsoft's operating
system and browser to get to the Internet -- and to Google -- or
they can use Apple's. It truly doesn't matter. Meanwhile, with every
new Internet fad, like the current frenzy over social networking,
Microsoft is invariably caught flat-footed and has to race to just
get a foot in the game. But that's always the way it is when
companies get big -- and it is why real innovation always comes from
small companies that don't have a predetermined mind-set, or
monopoly profits to protect.

Will the purchase of Yahoo -- assuming it goes through, which is far
from a foregone conclusion -- be a game-changer for Microsoft?
Anything is possible, I suppose. I spoke to a number of technology
experts Friday who were convinced that it made some sense. Andy
Kessler, the technology investor and writer, called it "a smart
offensive move." Mark Anderson, the president of Strategic News
Service, said, "They are getting the No. 2 online guy in the ad
business at a good time and a good price." Rob Enderle of the
Enderle Group told me that it was only a matter of time before
somebody made a bid for Yahoo -- "and it makes sense that it's
Microsoft."

But let's be honest here. Microsoft isn't exactly buying a
high-flier. Even after a Microsoft-Yahoo merger, Google would still
have twice the search market of its competitor. Its ad placement
service is superior to either Microsoft's or Yahoo's. And Yahoo has
struggled enormously in the last few years. It, too, could have been
early in social networking; its chat rooms could have lent
themselves easily to something that might have rivaled Facebook.
Just like Microsoft, it missed the opportunity. It is quite clearly
a company that has lost its way, and the question of whether
Microsoft can refocus into a viable Google competitor, well, let's
just say I'm dubious.

I also have to wonder about what Yahoo gets out of the deal -- other
than a premium for its depressed stock. "Does it help their brand?"
asked Mark Mahaney, who covers Yahoo for Citigroup. "No. Does it
give them better search technology? No. Does it give them a better
ad sales force? No. I suspect this is the question being asked in
Yahoo's boardroom right now," he added.

What was most striking to me Friday was Microsoft's own expectations
for the deal. To put it bluntly, they are awfully low. When I spoke
to Yusuf Mehdi, Microsoft's senior vice president for strategic
partnership -- and the man who had been driving much of its online
efforts in recent years -- he never once talked about crushing the
competition, or even catching up.

A Yahoo deal, he told me, "will be good for consumers who want
another search engine, Web publishers who want another ad placement
service, and syndicated advertisers" -- who also want a choice other
than Google. He continued: "Because of Google's heavy volume and its
algorithms, they are a very efficient buy. But people are rooting
for a credible No. 2. We got lots of calls today from Web sites and
others saying, `We're with you.' "

Was he really saying that Microsoft would be content as a "credible
No. 2?" I had a hard time believing it. But when I pushed him on
this point, he reiterated it. "Online advertising revenues are going
to be $80 billion within a couple of years," he said. (They're about
$50 billion now.) "That is going to mean a tremendous opportunity to
all players. There has to be a place for another credible player."

I think back to the fall of 2005, when Bill Gates visited The New
York Times, and an editor asked him if Microsoft "would do to Google
what you did to Netscape?"

"Nah," laughed Mr. Gates, "we'll do something different." This ain't
it.