Can Yahoo save Microsoft?

In its face-off with Google, Gates’ empire must find a way to strike back.

It’s got to be strange to be Bill Gates right now. If anyone should be able to look back on a career with satisfaction, he should. The co-founder of Microsoft is retiring later this month to devote his energies to the Bill & Melinda Gates Foundation. He leaves behind not just one of the world’s most profitable and influential corporations but two entire industries. Before Gates started Microsoft 30 years ago, computers were things delivered by forklift, and software was free. Today, PCs are as ubiquitous as cellphones, and software is a quarter-trillion-dollar business.

What set Gates apart wasn’t just his technical brilliance but his business vision. He saw that if he used his Windows operating system to unify the look and feel of every PC, three things would happen: Consumers would buy more PCs because they were easier to use, developers would respond by writing more programs and games to make the experience more fun and useful, and chip makers such as Intel would invest in faster chips to allow this cycle to repeat.

Economists have long understood the usefulness and power of having one platform in certain industries. But it rarely happened without government intervention because it was prohibitively expensive. Gates understood that software was different. Once the R&D was done, it cost next to nothing to produce and distribute. And by the 1990s, the world was coming to grips with a powerful new concept: the network effect of software. It spawned the Microsoft monopoly and mowed down virtually any company that got in its way.

But now, Gates finds himself facing a network effect more powerful than his own — Google. Google is changing the way people buy, use and pay for software in ways as revolutionary as Gates did a generation ago — and Microsoft has been caught flat-footed.

Most people think of Google as just a great search engine. But, like a swarm of termites, it is also eating away at the foundation of Gates’ software empire. Like Microsoft, Google is a software company. Its products are not software in the Gatesian sense — that is, they’re not programs that you buy in a store and install on your PC. Instead, Google engineers write the programs, install them on the company’s servers and let users interact with them over the Internet through their browser. The programs allow you to do the same things as Microsoft’s: Send an e-mail, build an address book, create Word documents and Excel spreadsheets, produce PowerPoint presentations and on and on. The scary part for Microsoft is that Google lets people use its software for free and pays for it all with advertising.

The true mark of Microsoft’s Google fear is its effort to acquire Yahoo. Yahoo is bloodied from years of competing unsuccessfully with Google. Microsoft, which has never bought a company for more than a few billion dollars, offered about $40 billion in cash and stock for Yahoo in February. But Yahoo wanted a lot more, and Microsoft, only willing to raise its bid a little, eventually walked away. Now the two companies are reportedly talking again about a merger.

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One Response

  1. cool article

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