Failed Microhoo Deal Primes Google for Enterprise

By Clint Boulton  |  Posted 2008-05-05

Failed Microhoo Deal Primes Google for Enterprise

The failure of Microsoft to acquire Yahoo could echo in the future of the enterprise market with Google emerging as the lead horse in the race, according to one analyst.

Interarbor Solutions analyst Dana Gardner said Microsoft's abandoning of its pursuit for Yahoo will not only keep Google in the lead of online search and advertising markets, but could have an impact on the future of the enterprise market.

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 Google is a relatively small player in the enterprise, selling search appliances to businesses and a collaboration suite that its hosts on its own servers as part of its cloud-based Internet services strategy. All told, these are believed to constitute only 2 percent of the company's revenue.

But as the computing landscape shifts increasingly toward cloud computing, Gardner said, Microsoft's traditional client/server and packaged software model will be threatened. Businesses are already looking to use applications that Google hosts in its own data centers. Microsoft wants to get to the same place and needs Yahoo to help do it.

"There's a great deal of consensus that the older approach of a client/server-based architecture is cost-inefficient," Gardner told eWEEK, adding that the cost of maintaining a PC in many enterprises is more than $1,000 a month.

Moreover, Microsoft's laborious Windows Vista operating system rollout hasn't assuaged any of these pains, meaning businesses will look at alternatives such as cloud-based computing or SAAS (software as a service).

In effect, if a company like Google lets customers use apps for $12 per user a month, more businesses will be compelled to look at the cloud, Gardner said. Microsoft, which broke off its bid for Yahoo on May 3, is in excellent position to do that given its value chain of partners and suppliers, segueing from its on-premises assets to more service-based offerings.

"This will come down to a competition of cost," Gardner said. "Microsoft is at a disadvantage because it's transitioning from a previous high-margin, on-premises software business to a more low-margin, high-volume cloud-based business. They're already at disadvantage economically because they're killing one cash cow to create a cash goat. Google doesn't have to kill anything because its ad-based revenues are all cloud-based already."

Microsoft Faces Online Services Challenge Without Yahoo

While many experts rightly point to the fact that acquiring Yahoo would help Microsoft narrow the gap between itself and Google in search and online advertising, perhaps the more significant assets Yahoo boasts are its online services, flexible open-source architecture and data center infrastructure.

Were Microsoft to acquire Yahoo, it would be better positioned to challenge Google in the cloud computing market. Without Yahoo, Microsoft must build its cloud strategy organically. On top of that, the company would have to provide backward compatibility between its legacy Windows and .Net architectures and the more distributed cloud services architecture.

"In order for them to be competitive, they're probably going have to embrace Linux, PHP, Apache Web servers and more, [such as] Hadoop, where it's [a] similar approach to the supercomputing approach on the grid," Gardner said. "That's going to be a long haul because Microsoft has not designed its technology for that. It's designed its technology for department-level servers and PCs."

Ultimately, Microsoft will need to be on the short list of the best providers of cloud-based services in the next five years, Gardner said. This won't happen overnight and Google will continue to execute and innovate, doubling Microsoft's challenge.

Meanwhile, the world can look to Wall Street for an idea of what financial analysts think the failed deal means for Google.

While Yahoo's shares plummeted almost $5 on May 5 following Microsoft's official exit from the deal table, Google's own stock ascended nearly $13 on the development, a sign that financial analysts believe Google won a significant victory over Microsoft.

By announcing a test to run its paid search links on Yahoo search April 9, Google essentially came to the Microhoo table with its own poison pill. Did Microsoft want to buy a Yahoo with Google's search terms running on its site?

The answer, resoundingly, was no. Not given the potential to pad Google's war chest and not with the specter of regulatory issues hanging over the Google-Yahoo outsourcing pact.

Now the industry waits to see if Google and Yahoo will make the test an actuality, bringing new sales to Yahoo and more Web real estate and cash for Google-served ads. Google did not respond with comment, but the common belief is that the deal could go through as early as the week of May 5.

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