Bill Gates worried that something like Google would come along before it even existed.

This time, Microsoft may meet its match in Google

The firm is back to its aggressive ways in its Yahoo bid. But the real fight is with Google, and it's the underdog.
Bill Gates worried that something like Google would come along before it even existed.

In 1995, the Microsoft leader recognized how a powerful Internet player could topple his company from the high-tech pyramid and launched an attack on all potential threats. Netscape, Sun Microsystems and other competitors paid the price.

So did Microsoft. Its tactics triggered a landmark antitrust case that handcuffed the software giant for a decade, hampering its ability to respond when the real Web boogeyman appeared: Google Inc.

But today the shackles are off. Largely unconstrained by the antitrust problems that have dogged it since the late 1990s, Microsoft is the aggressor again.

Its surprise $44.6-billion offer for Yahoo Inc. capped off a year in which Microsoft proved that it was serious about the Internet and willing to throw around its cash hoard.

Yahoo's board of directors has decided to reject the offer, a person familiar with the matter said Saturday. The person, who is close to Yahoo management, said the company planned to tell Microsoft in a letter Monday that the deal undervalues the Internet company and fails to offset its risk if regulators were to overturn the merger.

Although Yahoo doesn't want to sell to Microsoft, it has few alternatives. Many analysts expect Microsoft to sweeten its offer, and Yahoo to accept it.

If it wins Yahoo, the Redmond, Wash.-based software giant will have pulled off by far the largest acquisition in its 33-year history to try to keep Google from getting further ahead.

"Microsoft tends to be a reactive company," said Mark Anderson, an entrepreneur and author of an industry newsletter that counts Gates and Microsoft Chief Executive Steve Ballmer among its subscribers. "They also tend to always be focused on their competition, even down to the individuals that run divisions on both sides."

Google is lobbying against a potential Yahoo deal, saying Microsoft can't be trusted. Microsoft counters that it isn't the dominant player in Web advertising as it is in operating systems and office productivity software.

Pulling for former foe

Fearful of the new giant on the block, some of Microsoft's old enemies are rooting for it.

For years, Chris Tolles had a front-row seat to the brutal side of the so-called Beast from Redmond. The software developer worked at companies that went head-to-head with Microsoft, including Sun and Netscape.

But now he's running Topix, a Silicon Valley company that offers local news and other information online. Google launched a competing product last week.

"Creating a valid competitor for Google would be very helpful to the industry," Tolles said. "That's the irritating part: I'm rooting for Microsoft."

Microsoft, which declined to comment, doesn't enjoy the underdog role.

After its previous attempts to acquire Yahoo or strike a partnership were rebuffed, Microsoft made an unsolicited bid for the company Jan. 31 and announced it the next day. The half-cash, half-stock bid valued the struggling Internet company at $31 a share -- 62% more than its stock's closing price Jan. 31. But with the slump in Microsoft's share price since then, the offer's value has declined to $29.08 a share. Investors expect Microsoft to offer more.

"We keep at things," Ballmer told employees when the bid was announced. "We don't start and stop."

It's been a long, eventful struggle since Microsoft began its online push.

In a lengthy memo sent to Microsoft executives May 26, 1995, Gates warned that the young World Wide Web could spawn a competitor to threaten the software giant's computing dominance. He assigned the Internet "the highest level of importance."
The Internet is a tidal wave. It changes the rules," he wrote. "It is an incredible opportunity as well as [an] incredible challenge."

On Dec. 7 of that year, he unveiled a new Internet strategy. Among several initiatives, Gates announced that the company would give away Internet Explorer with its Windows software, a direct attack on Netscape's pioneering Web browser.
Gates then noted that it was Pearl Harbor Remembrance Day. The most intelligent comment after Japan's attacks, he said, was made by a Japanese admiral who said he feared his side had awakened a sleeping giant.

The message was unmistakable: Microsoft no longer was slumbering.

The aggressive and ultimately successful strategy to crush Netscape and other Internet rivals brought major legal troubles. The Justice Department, several states and the European Union filed antitrust claims, contending that Microsoft abused its operating system dominance. Competitors such as Sun also sued.

The court cases forced Microsoft to bank huge amounts of cash for settlements. Microsoft began resolving those cases in 2002 and has spent about $6 billion in cash and consumer software vouchers to end the litigation.


Tangled on Web

Through it all, the company's Web initiatives struggled. Despite hundreds of millions of Web users, its online business has lost about $2 billion since 2003, said Matt Rosoff, an analyst at research firm Directions on Microsoft.

"Microsoft has yet to show much aptitude for management of online stuff," said Timothy Bresnahan, chairman of Stanford University's economics department and a former antitrust official. "All of that effort alienating everyone that works with them to win the browser war . . . and what do they do with the browser? Zip."

Meanwhile, Google's profit has skyrocketed thanks to its Web search advertising business. Google conducted 56.3% of all U.S. search queries in December, compared with 17.7% for Yahoo and 13.8% for Microsoft, according to research company Nielsen Online.

Google also is encroaching on Microsoft's turf, offering free word processing, spreadsheet and other office programs over the Web.

Microsoft has taken the rivalry personally. In 2004, Mark Lucovsky, a senior engineer at Microsoft, told Ballmer he was joining Google. Ballmer threw a chair and began spewing expletives, according to court documents in a lawsuit Microsoft filed over another employee who left for Google.

"I'm going to . . . bury that guy. I have done it before, and I will do it again," Lucovsky recalled Ballmer saying about Google CEO Eric Schmidt, who had been an executive at Microsoft rivals Sun Microsystems and Novell Inc. "I'm going to . . . kill Google."

Ballmer later said the description was exaggerated. The suit was settled in 2005.

But in Silicon Valley the reported exchange came to symbolize Microsoft's growing frustration. As the company began to settle its antitrust lawsuits, it started using its saved money to buy its way back into contention on the Web.



Fighting with cash

Microsoft has done 89 sizable acquisitions since 1994, but most have been for less than $1 billion. It preferred to buy small companies and use their technology to grow instead of bigger companies with large market shares or high sales.

That changed after Google outgunned Microsoft for online ad firm DoubleClick Inc. in April with a $3.1-billion offer.

"That injected a sense of urgency," said Scott Kessler, an equity analyst for Standard & Poor's.

A month later, Microsoft made its largest purchase to that point, buying online ad firm AQuantive Inc. for $6 billion. It was a bid no other company could match, Kessler said.
In October, Microsoft outmaneuvered Google for a small piece of the booming social networking company Facebook Inc., paying $240 million for a 1.6% stake. Microsoft reveled in the victory, announcing the deal while Google was holding its annual analyst meeting.

Because Microsoft is playing catch-up in online advertising, regulators have given it more leeway to make big Web acquisitions. Google's deal with DoubleClick was closely reviewed by U.S. regulators before they approved in December (the European Commission is still considering the deal). Though twice the size, Microsoft's AQuantive deal sailed through.
Google is preparing to argue in Washington that regulators should consider Microsoft's prior offenses if Yahoo agrees to a deal.

"We are dealing with a unique competitor here," said a person familiar with Google's thinking. "Nobody else has the operating system monopoly. Nobody else has the browser monopoly. Nobody else has been found by the regulators and the courts to have abused those monopolies."

But times have changed, said Eric Goldman, director of the High Tech Law Institute at Santa Clara University. Google's dominance in online advertising might help Microsoft executives if they have to defend the Yahoo deal to antitrust regulators.

"They get to make all the arguments that have been made against them for so long," he said.

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Yahoo! continues to lead Japanese online search market

Yahoo! continued to lead the search market in Japan in December, new research suggests.

According to figures produced by comScore, the US-based search engine experienced 42.1 million visitors during the month.

Meanwhile, rival Google came in second position, securing visits from 32.3 million Japanese internet users, while Microsoft - in third place - saw 29.1 million people access its sites.

Analysis of Japanese web rankings in October revealed a similar pattern, with Yahoo! sites attracting 41.3 million visitors, while Google and Microsoft had 31.7 million and 29.4 million respectively.

Commenting on the success of Yahoo! in the country, managing director of comScore Japan Maru Sato stated: "Yahoo! maintains its hold on the Japanese internet market. [Its] sites reach nearly 77 per cent of the total internet audience in Japan."

Also performing well over the festive season, Rakuten was the fourth most popular internet property, with just over 29 million visitors.

Founded in February 1997, the company operates one of the biggest online shopping services in Japan.

Additionally, it was revealed that, as a result of the December celebrations, visits to e-card sites rose by 171 per cent, making it the top-gaining category over the month. Such sites attracted 5.5 million visitors over the 31-day period.

Also, retail sites experienced strong growth, including the jewellery, luxury goods and accessories category, which jumped 25 per cent and was accessed by 2.1 million internet users.


Microhoo At One Week 1: Decision Nears? Yahoo Brand To Survive?
Has it only been a week since Microsoft thought it was a nice day for a Yahoo wedding? Indeed, so. And what's happened since? Rumors that Yahoo is nearing a decision, while Microsoft's Steve Ballmer seems to want to encourage his potential new employees that a Yahoo brand will survive. Let's do the news.

from TechCrunch suggest today is the day that Yahoo will make a decision:

Sources have indicated to us that Yahoo has scheduled a special board of directors meeting on Friday to determine, effectively, the fate of the company.

There's been much speculation over the last week if anyone could save Yahoo from Microsoft. Could Google jump in to buy Yahoo? Probably not because of competition laws, but it does seem like a partnership with the company might be the only real alternative. Below, stories over the past week on the idea of Google as Yahoo's savior, plus Google's concerns that Microsoft might win Yahoo's hand:

How about others? Today's big news in that department seems to be that Softbank -- which owns a big chunk of Yahoo Japan -- which is a money making powerhouse -- doesn't plan to sell its stake to Microsoft but rather is playing wait-and-see.
One biggest challenge to the deal may be if Microsoft's shares drop. Since the deal is tied to the share price, Microsoft Bid for Yahoo Drops To $29.50 a Share from Silicon Alley Insider noted that the initial value of the deal has already gone down. That could put shareholders on both sides off.

Another challenge is that Yahoo employees are a proud lot with execs that TechCrunch says will do anything to thwart a deal. I can certainly agree with that. So it's interesting to hear this in Will Yahoo! Feel the Love? from BusinessWeek:

Ballmer says: "Yahoo, the brand, will live."

In reality, Ballmer can't say that at all. Microsoft was at pains to tell us that no specific decisions have been made -- that they cannot be made until executives from both companies meet (if the deal goes ahead) and mutually decide what makes sense. Yahoo the brand might very well NOT live. Or it might live but certainly not be a flagship brand -- though if Microsoft were wise, they'd certainly keep it a strong one.