As most everyone knows by now, Yahoo! rejected Microsoft's increased share price offer of $33 per share. Microsoft promptly stepped away from its proposed Yahoo! acquisition with both Steve Ballmer and Bill Gates stating publicly that the pursuit of Yahoo! was over. This news has been all over the media including websites with financial pages, so I won't bore you with the details.
Microsoft was wise to back away, because one sick business unit acquiring another sick business unit simply makes a bigger sick business unit. Rumors abound that Microsoft will make a later play for Yahoo! at a more favorable share price.
Microsoft should stay away from Yahoo! and pay attention to the business conditions they face and the threats to their existing businesses.
The Yahoo! acquisition would have distracted Microsoft from going into new markets, and the process of integrating the Silicon Valley based Yahoo! with its wide, open culture into the laid-back Microsoft culture would have been painful and time consuming. Many engineers would have left Yahoo! rather than enter Microsoft's somewhat stodgy atmosphere, engineers that Microsoft sorely needs.
The search wars are over and Google is the big winner. As I stated in a previous post about Google, no one in North America is going to catch the Internet behemoth. In China, a huge growth area, the Chinese search company Baidu.com is now ahead of even Google in the number of searchers on the web and holds a commanding market share in China of more than 50%. Microsoft is nowhere in our own country, which represents the world's largest market in Internet search and advertising.
Microsoft must now pursue new markets involving the Internet and the Worldwide Web. They have to modify their current business model dependence on operating systems and office software to implement new, profitable technologies that work well with the Internet. They have major threats to their existing business as software and computing moves onto the Web.
Microsoft is under fire from threats like SaaS (software-as-a-service), where software applications like Excel or CRM (customer relationship management) are stored on a website, downloaded by demand, used, and then all results are stored back on the website. Several companies, including Google with its own office suite and Salesforce.com with its CRM package have already entered this market. The revenues from these efforts are not yet comparable to those from Microsoft's Office, but the volume will grow. Eventually, the trickle of revenues from web-hosted software will turn into a flood, all at the expense of Microsoft profits.
Virtualization software will cut into Microsoft's Windows business. Vmware and Citrix Systems typify the competition that Microsoft already faces with this technology. Virtualization means fewer computers needed in back room computing and fewer Windows operating systems sold. Worse for Microsoft is that a full-blown operating system such as Windows Vista is not needed in the virtual world. A small operating system called a "kernel' is sufficient. Microsoft must address this threat quickly.
"Cloud computing" is unique to the Internet but still a concept starting to materialize without Microsoft. IBM was an early implementer of cloud computing when the company sold computing time on its own corporate computers when they were not in use. Amazon.com is another seller of compute time on their unused or lightly used computer systems to companies that would rather lease computer time than purchase, install, and maintain more computers into their already too-expensive IT departments. After all, who buys books at two o'clock in the morning? In the future, a company or even we consumers need only use our browsers to locate an unused or lightly loaded computer to do our computational work. We won't know the location of the computer or who owns it, but we won't care. This situation, too, will result in a loss of revenue for Microsoft, as fewer computers are needed along with fewer Windows operating systems and Office software. Microsoft must address this, as most of their quarterly revenues and profits come from operating systems and office software.
The Internet is still very young with many unknown opportunities waiting to be discovered. Microsoft should go looking for such opportunities and exploit them before they are a shell of their former self.
Microsoft nor their shareholders need the Yahoo! distraction.
Copyright by Bill Durrenberger May 12, 2008 All rights reserved.
Disclaimer:
The statements and information presented in
this article reflect the opinions of the author and do not constitute a
recommendation to buy or sell specific securities.Before purchase of
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Great article Bill. You're right on with this one.
Posted by: Jim Haprian | May 16, 2008 at 08:39 AM