Microsoft's Online Worries Extend Far Beyond Google Search

Microsoft's Online Worries Extend Far Beyond Google Search

Yahoo investor Carl Icahn, who owns 5 percent of the company, said in a recent interview that he still supports a search deal between Microsoft and Yahoo. Icahn said he believes that by engaging in such a deal, Yahoo could save some cash and become more solvent. At the same time, Microsoft could enjoy far more leverage in the search space as it attempts to compete with Google.

This isn't the first time a deal between Microsoft and Yahoo has been floated. In 2008, Microsoft attempted to acquire Yahoo for a 67 percent premium on its stock price in a deal valued at $44.6 billion. After being rebuffed on multiple occasions, Microsoft walked away from the table, only to come back later in an attempt to acquire Yahoo's search. Jerry Yang, the former Yahoo CEO and the company's founder, blocked any deals from happening and, once again, Microsoft was forced to walk away with nothing.

But now, Yahoo is in under new leadership. The company's CEO, Carol Bartz, has said on numerous occasions that she would entertain a Microsoft search deal as long as it involved "boatloads of money." She estimated that if the deal gets done, Yahoo could save $500 million to $700 million by cutting staff and reducing data center costs. From Yahoo's perspective, the deal might finally make some sense.

But what about Microsoft's perspective? Speculation abounds that Ballmer and co. are at the negotiating table once again with Yahoo for some kind of search or advertising alliance. Rumors suggest Microsoft is getting closer to inking a deal that would see its 8.4 percent market share combined with Yahoo's 19.6 percent market share to face off against Google and its 65 percent share. Some contend that such a deal could significantly help Microsoft in the search space.

Although that might be true, how smart is it for Microsoft to engage in search deals with Yahoo? Granted, the company has all the cash it needs to acquire Yahoo's search and still have some left over to invest in other opportunities. But that doesn't make it a good move. Microsoft's core business is being targeted directly by Google.

The search giant is bringing an operating system online, it already offers an office applications suite on the Web, and Chrome, its Web browser, is growing in popularity. In each case, Google is targeting the core of Microsoft's business. Even that 28 percent search market share could mean nothing if Microsoft loses its grip on operating systems and its Office suite.

Online Operating Systems Are the Key

Chrome OS

Microsoft needs to focus its attention, first and foremost, on the online operating system space. Google announced Chrome OS recently in a bid to compete with Microsoft Windows in netbooks. But anyone who believes Google will stop there is kidding himself. Google will continue its push in the operating system market, doing its best to attract users on any computer. Google doesn't just want to get into the OS market, it believes that the future of that space is on the Web and it wants gain control of that space before Microsoft can effectively counter this move.

Microsoft seems to understand that. It also announced Gazelle, which, at this point, is a model for developing a browser-based operating system that can manage system resources. That sounds more powerful than Chrome. But will it come to fruition? At this point, it's anyone's guess. But it's hard to believe that Microsoft would allow Google's domination to continue unabated as it delivers an online OS.

Office

Another core of Microsoft's business is Microsoft Office. It appeals to both the consumer and the enterprise. It's also one of the top revenue drivers for Microsoft. Realizing that, Microsoft should be concerned that Google and a smaller company, Zoho, are attracting customers who don't have a real need for Office. They can simply go online, type up a simple document, create a basic spreadsheet or develop a simple presentation in no time. It's convenient. And as long as Google follows through with its promise to make Google Docs easily accessible through Chrome OS, it could spell trouble for Microsoft. Synergy, which worked in Microsoft's favor, is now working against it.

And that's precisely why Microsoft needs to focus its online efforts on software. Although search has helped Google stay dominant online and Microsoft has a new search engine, Bing, search is not Microsoft's core business-software is. As long as Microsoft allows Google to take the lead online, it will have an even more difficult time catching up. That could mean a severe drop in revenue and profitability.

It should be noted that that impact is many years down the road. For the foreseeable future, Microsoft will still hold the high ground, thanks to the enterprise need for on-premises software to handle powerful applications. But today is the beginning of a new OS war on a new frontier. Google is laying the groundwork for what could become a real Windows challenger. If Microsoft doesn't respond now, it could find itself clinging to Windows on the desktop as both consumers and the enterprise move online.

So, while search is a concern in the short term, Microsoft needs to look at its core business. It needs to block Google. And it needs to ensure that its ability to control software won't be put into jeopardy by focusing too much of its attention on Bing.