By Peter Whoriskey and David Cho
Washington Post Staff Writers
Saturday, February 2, 2008
In a bid to halt Google's growing dominance online, Microsoft has offered to buy struggling Internet giant Yahoo for $44.6 billion, an acquisition that would unite the world's most influential software company with the Web's most-trafficked site.
If approved by Yahoo's shareholders and by regulators, Microsoft's unsolicited offer would set up a titanic corporate struggle between Microsoft and Google for the patronage of millions of Internet users around the world.
Microsoft sells the operating systems and Web browser used on the vast majority of the world's computers. It was once feared as a near-monopoly with unbounded power over personal computing. But the proposed deal tacitly acknowledges that the software giant has failed to reinvent itself as computing shifts more online; instead, it is trying to buy its way into a stronger position. The proposed acquisition would give Microsoft access to Yahoo's 137 million monthly visitors and long reach into the lives of consumers in the online realm. There it would confront Google, which through its preeminent search engine now captures the biggest share of online-advertising money. It is also branching out in many directions at once, into office software, mobile phones and, through its purchase of YouTube, entertainment.
"The market is increasingly dominated by one player," said Kevin R. Johnson, a Microsoft division president, referring to Google. "By combining assets of Microsoft and Yahoo, we can offer a more competitive choice for consumers, advertisers and publishers."
Yahoo said it would evaluate the offer "carefully and promptly in the context of Yahoo's strategic plans." Its representatives declined further comment.
A Google spokesman said it was premature to discuss the offer.
The proposed deal reflects the huge changes in how people use computers.
Increasingly, the machines owned by consumers -- desktops, laptops, mobile phones -- are valued less for their computing power than for their connections to online media.
Microsoft, a creation of the previous era, has struggled to adapt to the shift, though it recognizes its importance. In announcing its bid yesterday, Microsoft executives estimated that the online advertising market -- $40 billion in 2007 -- will double by 2010.
Matt Rosoff, an analyst at Directions on Microsoft, an independent research firm that focuses exclusively on the company, said he viewed the bid as a reflection on the company's previous attempts to go online with MSN and other services.
"I think that's a tacit admission of failure" in online services, Rosoff said. "They've poured a lot of money into it and tons of resources and they've basically said, 'Well, we can't do it on our own.' " Google, meanwhile, has excelled online, where it was born as a search engine designed by Stanford University graduate students.
Its lofty and oft-stated goal is to "organize the world's information," but its financial success comes from capturing as much as 40 percent of online ad sales, according to analysts. Much of Google's ad money comes from ads related to searches, in which companies pay for messages to be presented with the results for specified search terms.
Google's search engine has -- and provides side-by-side ads for -- 62 percent of the world search market, according to ComScore, a marketing-research company. Yahoo's search, its closest competitor, has 13 percent, and Microsoft has 3 percent.
With immense profits from its search engine, Google has recently entered fields that directly threaten Microsoft's core business. For example, a considerable portion of Microsoft's revenue comes from sales of word-processing and spreadsheet software. Google now offers free online word processing and spreadsheets.
Such threats from Google propelled -- almost forced -- Microsoft to counter its rival, analysts said.
"This is a shotgun wedding, and Google is holding the shotgun," said Kevin Ryan, vice president of Search Engine Watch and Search Engine Strategies. Asked why a deal for Yahoo is being proposed now, Microsoft chief executive Steven A. Ballmer obliquely cited Google's gathering market power.
"We had discussions a year ago, and they didn't conclude in anything," Ballmer said in an interview. Since then, "the position of the market leader has gotten stronger."
Whether the proposed union would work is open to questions regarding both its legality and effectiveness.
First, the offer must be accepted by Yahoo's shareholders. Yahoo co-founder and chief executive Jerry Yang has reportedly resisted selling, but the offer of $31 a share -- when Thursday's closing price was below $20 -- is likely to be attractive to the company's shareholders.
In Microsoft's offer letter, Ballmer noted that Yahoo resisted his previous overtures because executives hoped that such initiatives as improving the Yahoo search engine would improve the company's standing.
But "a year has gone by, and the competitive situation has not improved," Ballmer wrote.
Microsoft warned in its letter to Yahoo that its offer could turn hostile if Yahoo rejects the bid. Yahoo's entire board of directors is up for re-nomination this summer, and shareholders, urged on by Microsoft, could conceivably vote in a slate of candidates favorable to the deal.
Ballmer called Yang Thursday night to discuss the proposal. Ballmer was reluctant to discuss the conversation in detail. "I said we're making a good offer. He said he would consider it," Ballmer said.
The deal also will face scrutiny from antitrust regulators, who will hear from consumer groups concerned that so much power -- and consumer information -- would be concentrated in one company.
However, some said that allowing the acquisition would enhance competition by creating a credible competitor to Google.
"You want to encourage competition with Google," said Ben Scott, policy director at Free Press, a public-interest firm. "But you don't want to bend over backward to do that and end up with a duopoly that ignores the anticompetitive implications of Microsoft integrating Yahoo products into Windows."
The Justice Department and House and Senate committees are likely to review the transaction, officials said. "We will need to scrutinize the deal carefully to insure that it will not cause any harm to the competitiveness of what has been a vibrant high-tech marketplace," said Herb Kohl (D-Wis.), chairman of the Senate Judiciary Committee's subcommittee on antitrust, competition policy and consumer rights.
The subcommittee, which recently examined Google's proposed takeover of DoubleClick, would also look at whether a Microsoft-Yahoo deal would violate the privacy rights of Internet users.
"If you look behind the scenes, a few companies are aggregating their power in order to make the Web into a marketing business," said Joseph Turow, professor at the University of Pennsylvania's Annenberg School for Communication. "People's activities will be tracked and shaped by a very small number of companies who care far more about surveillance and targeted advertising than the public interest."
Whether a union of Microsoft and Yahoo would be enough to pose serious competition for Google is also an open question.
In announcing the deal, Microsoft said that by combining the companies' engineering expertise, and by saving duplication of efforts, it could become a formidable competitor in the online world. The marriage of the companies would save $1 billion a year, Microsoft said. It would also require integrating Yahoo's 14,300 employees into Microsoft workforce of 80,000 people.
The proposed deal got its first reviews yesterday from Wall Street.
Yahoo shares rose $9.20, to $28.38 -- reflecting investor belief that the deal will go through at $31 a share. Microsoft shares fell $2.15, to $30.45. Google closed at $515.90 a share, down $48.40.
Staff writer Cecilia Kang and staff researcher Richard Drezen contributed to this report.