Microsoft will pay high price for failing to learn history lessons

John Naughton
The Observer,
Sunday February 10 2008

This article appeared in the Observer on Sunday February 10 2008 . It was last updated at 00:26 on February 10 2008.
It's the metaphors and similes that get me. It's a shotgun marriage, declared one commentator, 'with Google holding the gun'. Putting Microsoft and Yahoo together, said another, was like trying to produce an eagle from an alliance of two turkeys.
This is unfair. Microsoft isn't a turkey, but a profitable, boring mastodon that entertains fantasies about being able to fly. Yahoo, for its part, is an ageing hippy who invented hang- gliding but aspired to fly 747s and then discovered that he wasn't very good at it. The mastodon hopes that by employing the hippy it will learn to hang-glide. The hippy's feelings about the whole deal are plain for all to see.
Microsoft's $44.6bn offer of cash plus shares for Yahoo has got everyone in a spin, partly because of its sheer size but mostly because they fondly imagine it heralds an exciting future. At last, they think - something that might stop the inexorable advance of Google toward world domination! If that's what they're hoping for, then this ain't it, alas. This isn't the opening of a new chapter in the history of the computing business, but - as John Markoff observed in the New York Times - 'the final shot of yesterday's war'. And even if the merger does take place in a reasonable timescale - and if it can be made to work - it won't make much of a dent in Google.
Why? Because Google has a stranglehold or a head-start in the three areas that really matter for the near-term future: search-based advertising; 'cloud' ( internet-facilitated) computing; and mobile phones. In the first two areas, Microsoft and Yahoo are also-rans, and although Microsoft does have some penetration in the mobile phone market, it's based on a proprietary-software model that is about to be blown apart by Google's 'Android' alliance - which links handset manufacturers to an open software platform.
As I write, the Yahoo board is meeting to consider what to do about Microsoft's bid. All attempts to find a rival bidder have come to nothing. There is talk of a possible alliance with Google in which Yahoo effectively outsources its search and advertising to its younger rival. This is cloud-cuckoo stuff: apart from the problems it would immediately raise with US and European regulators (who are already twitchy about Google), it would be as suicidal as Marks and Spencer outsourcing clothing and food to Tesco.
There is also the option of Yahoo splitting itself into its constituent operations and selling them off separately. But ultimately the problem is that Microsoft's offer places an absurdly high value on Yahoo, so the board would have to have some very good reasons for turning it down. The best that Yahoo can do, therefore, is to haggle before caving in.
But it will take quite a while to seal the deal - and as the lawyers haggle, Yahoo will effectively bleed to death. Many of its best staff won't want to work for Microsoft - and will find a warm welcome at Google, which is still desperate to find talent from whatever source. Other Yahoo employees will be wondering whether they will have a job in the merged company. And their concerns will be mirrored by their counterparts at Microsoft.
Microsoft's Steve Ballmer has said that he intends to keep the Yahoo brand. What then happens to MSN and Microsoft Live? Will Hotmail and Yahoo Mail both survive in the new set-up? What will happen to Flickr? Microsoft shareholders also seem less than ecstatic: the share price dipped 10 per cent after the original announcement. Many stockholders would prefer to see some of the Microsoft cash mountain returned rather than squandered on buying a declining internet company - and analysts were pointing out that, sooner or later, Microsoft would have to take a charge for the ludicrous premium it is offering Yahoo shareholders.
The joke is that all of this was going on in a week when Time Warner announced that it was looking for ways of divesting itself of AOL, that poster child of an earlier dotcom era. Marx was right about history repeating itself, 'the first time as tragedy, the second as farce'.