I've written extensively about the threat Google and Yahoo pose to Microsoft. My premise is not that online advertising is the big concern, but that it's a revenue model that will provide initial profits to bankroll the development of internet-based alternatives to Microsoft's core business, namely the Windows and Office franchises.
The angle has been met with more skepticism than I expected. Based on what I'd heard through my circle of friends and contacts, I thought nearly everybody was rooting for a company to finally challenge Microsoft's iron grip on computing, and believed that Google and Yahoo were working on it.
Then came Microsoft's bid for Yahoo a couple of weeks ago. The press reported mostly what Microsoft stated as the reason for its interest in Yahoo: to create a stronger rival to Google's online advertising business. Here at The Kelly Letter, we never bought that idea.
Folks, Microsoft is in imminent danger. It's not worried about missing out on a big business opportunity (online ads); it's worried about remaining a necessary path to working with a computer (the OS and the productivity software). For the first time in its history, Microsoft is facing competition that has a chance to unseat it from the PC monopoly chair that it's occupied for so long.
I received a raft of email from people more computer savvy than I suggesting that I stick to investing and leave the technology forecasting to others. "It's obvious from your summmaries that you have no idea how the core parts of an operating system function," wrote one man.
He's right about my not knowing the guts of operating systems, but do I really need to know how they work to see an alternative way forming? Was it necessary to understand steam locomotion to notice that cars were becoming more popular than trains? Was it necessary to know how cassette tapes were made to see that CDs and DVDs and eventually MP3s would win out in the end? I don't think so.
Similarly, I may not know the process behind coding Windows Vista, Office, Yahoo Mail, or Google Docs. What I do know is that there are no more software stores where you buy computer software in a box, take it home, and install it from disks. Everything I get comes from the internet now, and it's probably the same for you. That's an actionable trend. As goes everything else digital, so will go operating systems and productivity software, and the same thing that happened to Egghead Software's profits could happen to Microsoft's.
Finally, I discovered that I'm not the only one who thinks the Microsoft bid for Yahoo is about more than ads. Rob Cox and Jeff Segal wrote at Breakingviews on Monday:
What if the deal isn't just about online advertising? What if at stake in the battle is the very survival of Microsoft's core software business? Microsoft would never admit that so much is on the line. But there is a case to be made that acquiring Yahoo would go beyond rectifying Microsoft's online business to strengthening the moat protecting its franchise on desktops around the world.
Google sees a future where customers bypass Microsoft to use applications, like spreadsheets and word processors, which it offers for free on Google Docs. So far, Google Docs hasn't dented Microsoft's desktop dominance. But its growth is impressive. In November, unique users of Google Docs surged to 1.6m from 600,000 in June, according to Compete.com. And Google says 2,000 new companies start using its Google Apps subscription-based business software each day.
I think this view that the real reason for Microsoft's interest in Yahoo is the future of Windows and Office will gain popularity. As it does so, I expect people to conclude that Google has the upper hand because Microsoft will kill whatever progress Yahoo was making, leaving only Google as the alternative to Microsoft. More about that idea here.
If it comes down to who makes better online applications, Google or Microsoft, only a drunk would put his money on the latter.
