Why Microsoft Must Win Yahoo

The reason Microsoft is willing to do whatever it takes to win Yahoo is that it must. From a Tuesday night Reuters story:

Microsoft Corp will authorize a proxy battle for Yahoo Inc this week to convince the Web company’s shareholders to agree on a takeover deal that the Yahoo board so far has rejected…

If Microsoft decides to launch a proxy fight, it would nominate a slate of directors to take control of Yahoo’s board and support the company’s proposal. The nominees would be voted on at Yahoo’s annual shareholder meeting in June.

Microsoft would also risk alienating Yahoo’s rank-and-file by taking a hostile tactic. Unlike manufacturing companies with fixed assets, a key Yahoo asset is its engineering talent, and a hostile approach by Microsoft could lead to an exodus of Yahoo talent to Google Inc or other Web rivals.

A reader who is a cross platform developer, pointed out that this is not the first time Microsoft has worried about losing its monopoly position via the internet. He wrote:

The browser wars were not about browsers, but were really about Java. When you installed Internet Explorer you installed the Microsoft version of the Java runtime and that version was meant to be a Java killer.

I have used a number of so called “cross platform” libraries, but none of them has really solved more problems than they have created. Java, on the other hand, was the best cross platform tool I have ever used. For the first time I could program considering only the problem to be solved and forget about the platform specific assumptions. Java works by using a virtual machine, or VM. The code for the VM is platform dependent, but the Java code that runs on it is exactly the same on a Mac, PC, Linux, Unix system, etc. Well, almost, that is: this is where Microsoft comes in.

The biggest barrier to the development of a new OS is that until the OS has significant market share the developer community will not write significant applications for it. The OS will not attain significant market share until there are significant applications for it; chicken and egg.

There was for a while a groundswell of Java based office productivity tools under development. What that meant to me as an OS developer was that if I write a Java VM for my platform, I would be able to offer Java based office suites (significant applications) until native applications that used my unique capabilities were developed. This was the real threat to Microsoft.

To combat the Java threat, Microsoft created its own version of the Java VM even though Sun had already produced one for the PC. The basic premise of Java is that the VM always looks the same to the Java code. The Microsoft VM was different from every other runtime and did not follow the Java specifications.

Microsoft added its proprietary ActiveX extensions to its VM and used their compiler tools to encourage Java code that heavily used the extensions, thereby rendering it completely dependent on Windows. As I said, when you installed IE, you got the Microsoft Java VM.

Microsoft may have lost some part of the browser wars in court, but by the time they lost, Java was dead as an application developers tool. The Java based office suites were all cancelled due to the uncertainty in the Java world. Microsoft was so successful in pursuing its real objective that it killed Java end user applications without it ever becoming an issue. Thus, you think this is the first time in history its OS and office businesses are vulnerable.

It’s not.

To make this fight even more exciting, remember that Google CEO Eric Schmidt was once the Chief Technology Officer at Sun and became the CEO of Novell in 1997.

In both cases, he was stopped cold in his tracks by Microsoft’s shenanigans to keep open solutions from happening. It killed Java’s potential as described above, and it killed Novell’s NetWare by making many of its features standard parts of the dominant Windows OS. From Wikipedia’s Novell entry:

By 1999 Novell had lost its dominant market position, and was continually being out-marketed by Microsoft, which gained access to corporate data centres by bypassing technical staff and selling directly to corporate executives. Microsoft worked to make NetWare look second place with Windows 2000 features such as Group Policy.

Does anybody doubt Mr. Schmidt’s desire to see Microsoft’s monopolistic grip on computing broken?

Regarding Mr. Schmidt, Microsoft CEO Steve Ballmer said in an incident a couple of years ago, “I’m going to bury that guy. I have done it before, and I will do it again. I’m going to kill Google. . . . Google’s not a real company. It’s a house of cards.” Note that I paraphrased. To see the decidedly more graphic original, click here.

So, this bid for Yahoo has precious little to do with ads, as I mentioned last Friday. It’s not hard to see where the motivations come from.

Microsoft has attained its heights by copying other ideas, then out-marketing the originators of them or making the originators irrelevant by giving away comparable function as features in its OS, which comes standard on all PCs. They did that to Google’s CEO twice before in his career. In both cases, he was not in a position to fight back the same way because his company made money by selling the product that Microsoft was giving away.

What he needed was a source of revenue completely separate from Microsoft’s bread and butter, that he could use to bankroll the development of a free alternative to Microsoft’s bread and butter.

Now, he’s got it and can finally fight the giant with the giant’s methods. Microsoft could give away a standards-killing version of the Java VM because it didn’t need revenue from Java to survive. It could give away some capabilities of NetWare because it didn’t need to sell networking to survive.

Guess what? Google can give away an operating system and productivity applications because…it doesn’t need to sell them to survive. Moreover, the way it makes money is through advertising, and there are ways to incorporate ads into an operating system or productivity suite that might make the free versions profitable to Google in the future, while still leaving Microsoft unable to sell either Windows or Office.

Lest you think Mr. Schmidt has forgotten that Microsoft killed Java by giving away Internet Explorer, remember that Google loves Mozilla Firefox. True, it’s so much better than IE that it’s basically the only browser any intelligent company would endorse, but more than that it’s not Microsoft, and for Mr. Schmidt that’s an essential part of the big picture.

Meanwhile, back in Ballmer Land with the flying chairs and roared expletives, priority number one has become beating Google at any cost. Apparently, that’s literally the case as the price for Yahoo is rising by the week. The acquisition will not only be expensive financially, it may be very costly in terms of talent lost at Yahoo and time lost as the cultures attempt to mesh.

No matter, Yahoo must be absorbed into the Microsoft empire and focused wholly on putting Windows dependencies into all of its offerings. Remember that you read it here first when Yahoo Mail is functional only via Internet Explorer. Try using Google Firefox, er, Mozilla Firefox and you’ll get an error. Same with Flickr. And so on.

Yet, as good as that sounds for Microsoft’s situation, we’re still not at the reason it’s in a hurry to get better positioned against Google’s
inevitable OS release. That reason was sent to me by another reader named Jeffrey. Look at this:

That’s the gOS, the internet based OS I’ve been writing about for weeks now (but didn’t know already existed) and predicting would be the way of the future. I had the time frame wrong, it seems. This operating system is available right now for free.

Look at the icons along the bottom. Every one of them is an internet application. You can use every one of them without ever touching a Microsoft product. Oh, and by the way, notice which browser is prominently featured on the left.

No wonder it’s not safe to be in the same room as Mr. Ballmer these days. With Google Docs knocking at his door and gOS peeking in his windows (so to speak), he’s bound to be irritable.

Disclosure:The Kelly Letter owns shares of MSFT and YHOO, and is looking for the right time to sell both and put the proceeds into GOOG for the long haul.

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