Viewpoint: Microsoft Without Yahoo!

Having abandoned its most recent bid for Yahoo! Inc., Microsoft Corp. must now adopt other acquisition and product strategies to retool its business to address the burgeoning software-as-a-service model.

Focal Points:

• Microsoft initially submitted an unsolicited bit to Yahoo! of $31 per share on February 1^st indicating, yet again, the company's interest in an acquisition. While negotiations and speculation continued, Yahoo! eventually countered in mid-April that it was looking for $40 or more per share. Microsoft later offered $33 per share and the Yahoo! board indicated that it would consider a $37 per share bid or, though closer to $38 per share was preferable. Sources close to Yahoo! have indicated to industry insiders that Yahoo! CEO Jerry Yang was never really interested in a Microsoft acquisition and that several non-financial deal terms were completely untenable for the larger company.
• For Microsoft, the concept behind the Yahoo! acquisition – a strategy that the company initially embarked on in 2006 – is to speed its development and scale on the Internet. Microsoft remains the third largest search provider after Google, Inc. and Yahoo! respectively, and is interested in better monetizing search and other advertising revenue streams in addition to tapping Internet engineering talent. Microsoft has identified four key business growth strategies, and the need for a stronger revenue-generating online presence and social collaboration technologies are two key elements where Yahoo! could have played a major role. Other targeted business growth drivers include unified communication and virtualization. Microsoft CEO Steve Ballmer has declared that the company is committed to becoming a top online provider of connected social media and online advertising given his belief that this will be a primary source of revenue for the majority of software providers over the next decade.
• Microsoft is working to deliver on what it calls its "software plus services" strategy by working to adapt all of its server-based software solutions to a multi-tenant server model to allow business partners to more easily host managed solutions for customers. While this directional change has been in the works for years, re-architecting solutions to conform to the online collaborative Web 2.0 model requires significant rework and expertise in availability, network topology, security, and scalability. The company has already launched subscription-based services to deliver its Dynamics CRM and ERP packages and aims to leverage its strength in with Microsoft Office applications to build integrated added value with the online offerings.

Experton Group believes Microsoft walked away from the Yahoo! deal at the right time as the target company was putting up more trouble than it is currently worth to Microsoft. Despite Yahoo! positive recent quarterly performance, the company has been on a downward slide over the last few years as it struggles to keep up with search capabilities and online application innovation that Google and others have demonstrated. As Yahoo! is anything but out of the woods, it is entirely plausible that it will again find itself sitting across negotiating tables with Microsoft, perhaps in a position of less strength given its challenges with launching new services and generating increased advertising revenue.

Microsoft will attempt to acquire additional online engineering talent and market-leading service offerings as it tries to gain scale through acquisition, though this will likely present major cultural and technical challenges for the company. Without such an acquisition and cultural shift, Microsoft will see its business markets slip away at a greater pace. The majority of Web 2.0 firms are already employing open standards for data exchange and communication, and many firms have selected non-Windows Server bases for deployment. Microsoft will need to enhance its network and architectural expertise, as well as adopt a greater willingness to participate openly with the developer community, if it hopes to manage the difficult transition from a desktop and server software provider to a major contributor of online services.