Microsoft may seek ally vs. Google

Yahoo might help it slow rival's growth

May 05, 2007|By Eric Benderoff | Eric Benderoff,Chicago Tribune

There is a fundamental reason why Microsoft, the dominant software company of the '90s, would be interested in buying Web giant Yahoo: to slow the momentum of the dominating technology company of this century, Google.

In a rumor Wall Street reacted to strongly yesterday, Microsoft Corp. is said to be willing to spend $50 billion to buy Yahoo Inc., a top Internet portal that's home to news, entertainment features, e-mail services and fantasy sports leagues. The pairing would provide Microsoft with the dominant Web presence that its in-house MSN brand has had only marginal success filling.

There is no guarantee a blockbuster merger will materialize. Some reports late yesterday speculated that talks between the two companies already have halted, but others focused on whether those discussions involved an agreement to share certain resources, rather than a full partnership.

Whichever, the idea of a merger generated so much attention partly because of how dramatically the landscape has shifted. Microsoft, once the unrivaled giant, could use help from Yahoo to battle Google's growth.

Google Inc. doesn't have the entertainment Yahoo provides, but it has made significant inroads in recent years thanks to its purchase of YouTube Inc. and the successful launch of products ranging from a news service to e-mail.

More importantly, Google has become an advertising powerhouse that would still dwarf a Microsoft/Yahoo pairing in the booming and profitable field of search advertising.

"Buying Yahoo would even the playing field more with Google," said Ryan Jacob, portfolio manager of a mutual fund that has a 4.3 percent stake in Yahoo.

Microsoft has had "little success" in trying to "jump-start a lot of online initiatives," he said.

"Microsoft used to be the predator. Now, in certain ways, they have become prey," Jacob said.

Indeed, Google has been slowly eating away at Microsoft's core products in recent years.

It has introduced word processing and spreadsheet software to challenge Microsoft's Office suite of products; it offers e-mail tools to compete with Microsoft's Outlook and Hotmail programs; and a desktop search program that can scan all the documents housed on a personal computer, a tool that Microsoft has added to its new Vista operating system.

Of greater risk to Microsoft, Google's programs are free.

They provide consumers and small businesses with powerful applications that don't exact the cost of a software license.

"Google continues to do very innovative things," said Gian Fulgoni, the Chicago-based chairman of ComScore Networks.

"It's not clear that combining resources [with Yahoo] really solves the problem of slowing Google's growth," Fulgoni said.

Neither Microsoft nor Yahoo officials would comment for this article.

Google's biggest strength is its online advertising, an aspect of the Web the company so thoroughly dominates that it is now expanding into off-line products including television, radio and print.

"Google's power is really one of aggregating ad dollars," said Rob Enderle, principal analyst of the Enderle Group.

"That's where the focus of this pairing should be, that Google gets a monopoly of advertiser dollars. Google is not in the search business, they are in the advertising business."

Enderle said scale might be the only way to combat Google's growing advertising might. "You would have to build up this huge block of Internet properties," he said.

Eric Benderoff writes for the Chicago Tribune.

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