Why Microsoft should forget about Yahoo and buy Palm.

Innovation, the Internet, gadgets, and more.
Jan. 20 2009 7:33 AM

Forget Yahoo—Buy Palm

Why Microsoft would be foolish to get into the Web ad business.

(Continued from Page 1)

You could forgive Microsoft for being slow to develop its own Google-like search advertising business—search engines weren't its main focus. What's less forgivable is that over the last few years, the world's biggest software company has failed to adapt to the changing software market. Microsoft's apps integrate poorly with the Internet—how did you share your Word documents with co-workers before you had Google Docs? Microsoft's portable software also isn't very good. Apple, Google, Research in Motion (Blackberry's manufacturer), and Palm now all make stylish, easy-to-use mobile operating systems. Microsoft's mobile OS, Windows Mobile, looks ancient in comparison and carries none of the sex appeal that's proven so important in the sales of mobile phones.

Microsoft even failed to anticipate the next wave in PCs—its main business. Windows Vista, its current OS, doesn't work well on netbooks, the tiny, ultraportable, cheap laptops that are becoming a big part of the notebook market. Last month, I praised Windows 7, Microsoft's excellent successor to Windows Vista, which the company says will run well on netbooks. But many people who load up Windows 7 will still go elsewhere for most of the software they run on it—they'll download iTunes to manage their music, Google's Picasa to manage their pictures, and Firefox or Chrome to get online. When we think of the software that powers our most personal apps, we rarely think of Microsoft.

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Buying Yahoo would solve none of Microsoft's software woes—and could likely make them worse if Ballmer spends resources fixing what's wrong with Yahoo rather than fixing what's wrong with Windows Mobile. So here's another plan: Earlier this month, Palm unveiled its fantastic new phone, the Pre. The device looks to be the most advanced competitor to the iPhone yet—in many ways, its user interface, which is much more responsive than Apple's and features the ability to run multiple apps side by side, bests the iPhone. What it lacks, though, is distribution. The Pre will be locked to Sprint's network, and Palm has only a fraction of the marketing muscle of Apple, RIM, and Google.

Microsoft might pay tens of billions of dollars for Yahoo; it could pick up Palm instead for just $1 billion or $2 billion and then spend several hundred million more on transforming the Pre's user interface into a mobile OS that can run on phones made by multiple vendors. Microsoft would also gain a loyal Palm audience—and a base of developers looking to create apps for the device. And then Microsoft would have money left over to buy other software companies—startups and established firms that power the next generation of devices, or that are pioneers in the selling online software to companies. In other words, it could buy lots of companies that share its core mission—building apps—instead of one that makes its money in a completely alien business.

Over the past few months, Google, the company that Ballmer considers his main rival, has made a series of moves to cut costs and ditch parts of its business that aren't performing. It announced plans to close down the virtual world Lively, its video search engine, the Twitter-like service Jaiku, and the scrapbook app Google Notebook, among others. Many of these projects seemed like boom-era extravagances—things that might have seemed smart when Google's stock price was $700 but now look like deviations from the company's main business.

Microsoft's own boom-era delusion was that by buying Yahoo, it could succeed in both the Internet ad business and the software business. Now that the boom is over, Microsoft ought to take a page from its rival and pick a single business. In 2009, companies are expected to spend about $45 billion on Internet ads. The market for software is nearly 10 times that size—around $388 billion this year. If you were Microsoft, which would you choose?

Farhad Manjoo is a technology columnist for the New York Times and the author of True Enough.

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