Why Microsoft's play for Yahoo! isn't about search.

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Feb. 1 2008 5:10 PM

Get Off of My Cloud

Why Microsoft's play for Yahoo! isn't about search.

Also in Slate, Daniel Gross explains what Microsoft's bid for Yahoo! means for the economy and for Google, and Henry Blodget writes that Yahoo! won't be able to say no to Microsoft.

Microsoft's $44.6 billion bid for Yahoo! on Friday morning is already being cast as the prelude to the technological Ragnarok, the battle in which Bill Gates' venerable software company finally challenges Google's reign over the Web. The assumption is that, in attempting to buy Yahoo!, Microsoft is hoping to mount a challenge to Google's supremely profitable search business.

Google vs. Microsoft + Yahoo!—let's call the new company Microsoft!—would be a clash of the titans, but they wouldn't be battling over search. Yahoo!'s strength as a company has never been its search engine but rather its role as a portal to a variety of Web-based applications. Acquiring Yahoo! would not help Microsoft topple Google search. But the good news for Microsoft, if its acquisition should succeed, is that search is not the Web's final frontier. The next big score will come to whoever captures the market for everything else—photo-sharing, word processing, calendar-building—that people do (and will do) on the Web. When it comes to all of those other applications, Microsoft! would be in great position to head Google off at the pass.

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As access to the Internet has become ubiquitous, computer users have increasingly gone to the Web for what were once offline tasks. In the near-future, it will become more efficient to run an application, like a word processing program, off of a central network of computers rather than an individual hard drive. The concept is known as "cloud computing": Documents will begin and end their lives on a server rather than a personal computer, and users will be able to access their personal documents and favorite programs wherever they are with any networked device.

Yahoo!, Google, and Microsoft have all been ramping up to try to own the cloud—to become the "digital curators" of our personal information. Yahoo!'s recent acquisitions, such as the photo-sharing site Flickr and social bookmarking site Del.icio.us, speak to the company's goal to become the central hub for your Web activities. Google, too, has expanded beyond its core business of search. iGoogle, a personalized homepage, allows users to pick and choose from a library of applications. Google Docs, a word processor and spreadsheet tool, offers a Web-based alternative to Microsoft Office. And Microsoft's recent focus on Windows Live speaks to the company's goal to fight off Google and retain Office users as productivity apps begin to migrate online.

While Google has cast a wide net, the company's primary business (and pretty much only moneymaker) is still search. What began as a humble tool to search the Web has expanded to include books, scholarly articles, and blogs. Every time you use one of these tools—or read a message in your Gmail account—Google makes money by serving you ads based on the content you're looking at.

Yahoo!, on the other hand, has always been a portal first and a search engine second. As John Battelle notes in his 2005 book, The Search, Yahoo! did not begin as a made-from-scratch search engine. The company first partnered with a company called Open Text in 1995 and then switched, that same year, to AltaVista. As recently as 2004, Yahoo! was licensing its search technology from Google. Google has expanded its business by encouraging Web users to search for different types of content. Yahoo!, by contrast, has tried to draw in people who aren't just searching: the photo takers, the bookmark sharers, the music lovers.

Yahoo!'s experience as a portal and Microsoft's position as the leading provider of offline software are the ingredients for a powerful Google alternative. A recent survey found that only 6 percent of respondents had tried Web-based office applications, and nearly three in four had never even heard of such a thing. By comparison, there are hundreds of millions ofMicrosoft Office users. Even though Google Docs has a head start on the Web, Microsoft is perhaps better positioned to win the race. The challenge that Steve Ballmer and co. are facing is how to make a dominant offline franchise just as dominant online. "The Google threat is enormous," says Jonathan Eunice, the principal IT advisor for Illuminata, a technology consulting firm. "Microsoft is very specific in what it wants. ... Yahoo! has the user community. It has built a revenue model around being a place that people go. [Microsoft is] buying a user base and a crew at Yahoo! that can keep people coming back."

Should Yahoo! approve this union, the happy couple will change what it means to be a technology gargantuan. Search will certainly remain a huge business and a huge revenue-generator. It will gradually become less important, though, than monetizing the rest of the Web experience. To beat Google, Microsoft! will have to shift from selling shrink-wrapped products to offering flexible (and perhaps subscription-based) services. Whatever the business model turns out to be, the key to the next stage of Web hegemony will be owning the eyes of everyone who edits a document, reads an e-mail, builds a photo album, or updates the company payroll spreadsheet. If Microsoft can become Microsoft!, for once Google won't be the favorite.

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