Microsoft goes Shopping (Big Time)

So Microsoft has been window shopping for a long time now for a serious web presence and today they finally whipped out their hefty checkbook and announced what they wanted to buy: Yahoo. This announcement is quite simply earth shattering to anyone who has followed tech for any amount of time. Microsoft's largest previous purchase was a mere $6 Billion dollars for AQuantive Inc. last August. Now they have made an offer that dwarfs that one by more than seven times over. The offer as it stands now is $31 per share for a total of $44.6 Billion dollars. Many commentators think that Microsoft will eventually have to shell out substantially more than this to close the sale. This seems all the more likely after the way Yahoo's share price skyrocketed today.

This is a simply staggering sum. It represents a large portion of Microsoft's cash reserves and can only be viewed as a "bet the farm" move. What has made the world's largest software firm take this kind of gamble and what does it mean for the industry as a whole? The reason for the move is, of course, Google, the first company in more than two decades to pose a credible and lasting threat to Redmond.

So what should one make of this offer? Here are the implications as I see them:

1) Whatever else you think of the offer, it's one indisputable message is that Microsoft is admitting failure in all of its previous efforts to compete with Google on the web. Google has cleaned Microsoft's clock in terms of search share and internet ad revenue. Everything that Microsoft has tried so far has failed miserably to close the gap with Google. If anything, Google has continued to widen their lead.

2) As an admission of failure, this announcement must be crushingly demoralizing to all of the Microsoft employees in the MSN and Windows Live divisions. Steve Ballmer this morning basically told them that their efforts were inadequate and that Microsoft was going out to hire new talent who can get the job done.

3) As a result, if this offer fails to be accepted or is blocked by antitrust regulators, the MSN and Windows Live brands are damaged beyond repair. If Microsoft Management has written off these product lines, how can the rest of the market ever take them seriously again?

4) If the offer is accepted, but Microsoft still continues to loose ground to Google, where else does Microsoft have to go? They will be around $50 Billion dollars poorer and there will be no additional large players left to purchase. Google will have won the battle for the internet and cloud computing and Microsoft's slide into marginal relevance will accelerate. The desktop becomes merely a gateway to Google's world and any desktop, Windows, Linux or Apple will do just fine. Windows and Office will no longer be able to command the hefty price tags that they sport today and the Operating System and the Productivity Suite truly become a commodity the way hardware is today.

5) How in the world does Microsoft integrate the largely open source based Yahoo data center and infrastructure into the Microsoft Windows realm? Microsoft is famous in the industry for eating no other dog food than their own. Remember the embarrassment and stink that Microsoft faced when people realized that hotmail was initially running on Open Source software? Remember how Microsoft would not rest until they had migrated hotmail over to a Windows platform? Well that episode will pale in comparison to what Microsoft will have to endure to assimilate the Yahoo ecosystem. A wholesale "rip and replace" of the Yahoo server farms with Windows Server, SQL Server, IIS and Exchange will take incredible amounts of planning, manpower, capital and, most importantly, time. The $50 Billion price tag now starts to look more like $60 Billion. Wall Street has very limited patience when this kind of money changes hands. Investors will expect quick results and will not be willing to give the new Yahoo acquisition strategy much time, certainly not the 18 months to two years a rip and replace effort would take. But Microsoft's entire corporate DNA would reject the transplanted Open Source software sitting in the Yahoo data center during the interim. They will have no choice but to suffer the (to them) unthinkable humiliation of the new corporate flagship product running on the very open source software that they have previously called communistic and "a cancer." If they rush the rip and replace, they risk breaking the very expensive new toy they just bought and making the whole exercise for naught.

7) My experience with previous data centers I have worked in is that computer geeks who have spent sufficient time working with Open Source software develop a real aversion to any attempt to force Microsoft products on them. Really good Open Source programmers, systems administrators and DBAs will often walk out the door to another position before they willingly sit down in front of a MMC GUI screen on a Windows 2003 server. I expect that many of the deep Linux, Apache, and MySQL geeks at Yahoo will take the same walk before welcoming their new Redmond Overlords. Silicon Valley will be flooded with a tide of passionate and talented geeks looking for new challenges. Google, Sun, Red Hat and Oracle will welcome these pilgrims with open arms and open wallets. The recently purchased Yahoo will be left destitute of their best and brightest minds, which is really the only resource you would want to buy a tech company for in the first place.

So in short, what is the real story here? I see it summed up in one word, DESPERATION. Microsoft basically just put most of their chips on the roulette table and told the man to spin the wheel. If they succeed, the buy another five to seven years as kings of tech. If they fail, the cede the field of battle to their new masters at Google. We are in for a very interesting ride. Buckle up and stay tuned...