The real reason Microsoft wants Yahoo

Yahoo's server farm horsepower and development expertise will help Microsoft deliver new Web business apps

At first blush, Microsoft's proposed acquisition of Yahoo for US$46.6 billion is about growing its consumer advertising and portal business to better compete wit Google. And that's certainly part of the mix, but perhaps lost in the discussion is how such an acquisition could help Microsoft execute its software-plus-services strategy for delivering business apps over the Internet faster and better, said several analysts. That strategy could help Microsoft compete with Google's own business-apps initiative, they said.

"Yahoo has very efficient datacenters, as does Microsoft," noted Rob Koplowitz, a Forrester Research analyst. By combining their datacenters -- and, more important, their engineering talent -- Microsoft should be able to move faster and more efficiently on delivering business apps over the Internet, something that Microsoft has done at a fairly slow pace so far. "Yahoo's engineers can help," he noted, "And you know that there'll be engineers who are freed up" after the acquisition, should it go through.

"Although Google Applications have yet to make a real dent in the Microsoft Office giant, they do pose a long-term threat," said David Mitchell, a senior IT researcher at the consultancy Ovum. "As a defense against this position, Microsoft needs to accelerate its own move into online services. The online engineering capabilities that Yahoo has will undoubtedly offer Microsoft the potential to bring new services to market" and will help Microsoft stay competitive.

Koplowitz said he does not believe Microsoft is trying to buy specific technology from Yahoo to fill a hole needed to compete against Google's business offerings. Microsoft wants more talent and capacity to follow its existing strategy, he said. Google's approach is to offer pure Web-based apps, which he noted are more mature than Microsoft's Web-delivered apps. Microsoft's approach is to extend its 450 million Office desktop seats through additional software delivered via the Internet. The strategies have some overlap, but because they are different, Koplowitz expects Microsoft and Google to take different technology paths rather than try to copy each other.

Microsoft's acquisition of Yahoo would also bolster the company in another area where it has fallen behind Google: search, said Charlene Yi, a Forrester analyst. "Microsoft is interested in search because it provides a beachhead into businesses -- especially small and medium-sized ones that don't have a direct relationship with Microsoft," she said, as businesses typically buy Office software from retailers and resellers. Google is using search to forge those direct relationships and then offer business apps that compete with Microsoft's plans.

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Galen Gruman

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