By contributor
updated 2/5/2008 7:43:38 AM ET 2008-02-05T12:43:38

Few technology insiders doubt that Microsoft badly needs a second act.

After all, the software giant has rested comfortably on its safe but highly profitable cache of desktop software sales for years. Meanwhile, technology has moved on with mashups like the Apple iPhone and Google Maps that harness the Web in new, unexpected ways.

( is a joint venture of Microsoft and NBC Universal.)

Along the way, Apple brilliantly morphed into a multi-technology company, moving away from its personal computer roots. And Google, the world’s most trafficked search engine, has touted the advent of cloud computing while branching into new Web-related arenas where its tools can be of service, like cellphones. Recently, Google was one of the biggest bidders at an auction to buy wireless spectrum, the building blocks of cell-phone networks.

The result is that Microsoft is reduced to playing catch-up online. Some analysts think desktop software, Microsoft’s revenue cash cow, eventually could move to online distribution, too.

Enter Microsoft’s staggering $44.6 billion bid for the online search and services provider Yahoo.

“Microsoft needs a second act,” says Jonathan Yarmis, an analyst at AMR Research. “This move towards cloud computing is a real paradigm shift. Can Microsoft understand the market and innovate or respond quickly enough? That’s the question.”

Video: Microsoft’s Yahoo strategy

The trouble is that Microsoft increasingly looks like a lumbering giant, say analysts. As software moves to the Web through hosting and online services, desktop software is not the slam-dunk it once was. And Microsoft was slow to craft its own overarching Web strategy, remaining a distant third in unique vistors behind Google and Yahoo.

“The real technology isn’t on the computer, it’s on the Net” adds Ron Schmelzer, an analyst at Zapthink. “In that area, Microsoft hasn’t been firing on all cylinders.”

Now Microsoft is relying on its unfriendly bid for Yahoo to help regain badly needed luster. But some analysts say buying a struggling Internet portal company might not be the best way to achieve the transformation that Microsoft needs.

“Microsoft is seeking a transformative effect in the market,” says Schmelzer. But Yahoo, he adds has been “suffering rather than leading” and might not be the most attractive prey.

He suggests Microsoft might do better by plowing its billions into a social networking site like Facebook that can build buzz instead. Microsoft last year paid $240 million for a 1.6 percent stake in Facebook, a deal that valued the young company at $15 billion.

“Microsoft’s paradigm was good for the '80s and '90s, but it’s a different marketplace now,” Schmelzer says.

Still, revenue gleaned from search ads remains one of the Web’s biggest businesses, driving Google’s success. Yahoo languishes in second place, with only one-third of the search ad market.

“It has an inability to turn eyeballs into money,” adds AMR’s Yarmis. “Google has spanked Yahoo in that respect.”

Yarmis says Microsoft’s strength in commercializing technology could help Yahoo, but the outcome is uncertain. He and other analysts say the deal would do nothing to change what they describe as Microsoft's lack of innovation.

Some recent Microsoft products have bolstered that view. Microsoft’s long-awaited Windows Vista operating system was greeted with yawns and worse. Windows Mobile 6.0, the company's latest software for smart phones, was described as "a mess" by David Pogue, resident tech guru at The New York Times.

“There’s almost no key category that Microsoft has innovated,” Yarmis says.

Yahoo has not fared well lately either. The company was launched in 1994 as an Internet directory and saw its stock peak in 2000 at over $100 a share, compared with about $29 today.

And Yahoo has struggled to fend off Google. Yahoo’s share of the search market business has flatlined for several years now, as Google’s have risen. Meanwhile, the Web is morphing into a giant spine that people can use to download music, play video, socialize and, increasingly, download software — a trend that Google has ridden.

Of course, Microsoft does stand to gain more business if it manages to nab Yahoo. In 2007, Yahoo sites drew 136.6 million unique visitors, according to comScore Media Metrix. That’s a lot of potential customers on top of the 120 million who go to Microsoft’s sites. And Yahoo would give Microsoft a bigger toehold in the search market.

Marketing to new visitors may not be the bracing tonic Microsoft needs, though. Critics point to the disastrous match-up of AOL and Time Warner, which ended up dragging both parties down.

“Microsoft is going to have to be rethought,” says Schmelzer. “At Apple, it took a complete culture change to become a multi-technology company. Once the genetics changed, the company started innovating.”

Buying an also-ran company like Yahoo, even if the hotly contested bid does win, may only bring more problems in a fast-changing world where Microsoft’s once-bright light is dimming.

Constance Gustke is a New York-based freelance journalist.


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