Digital warriors

Talk of software giant Microsoft eyeing a partnership with "" or buying a stake in "" Internet player Yahoo, had been in the air for more than a year. Yet, when the final $46 billion bid (almost 80 per cent of Microsoft's turnover) was made on Friday, it managed to raise eyebrows. The deal seems to be a good one for shareholders of the ailing Yahoo; who else will pay $31 per share when the company's stocks had slipped to much lower levels? Indeed, it is Microsoft's stock that has fallen after the announcement, while Yahoo stocks have naturally moved up.

The battle between Microsoft and Google is shaping up to be the mega-contest of the digital age. It is true that Microsoft's move to acquire Yahoo cannot be countered by Google because of anti-trust laws, but Google is expected to soon win final regulatory approval for its $3.1 billion purchase of the online advertising firm, DoubleClick. Google has also given heartburn to Microsoft with its launch of Android "" a mobile platform for vendors to make low-cost mobiles with fast internet-surfing capabilities "" which poses a threat to Microsoft's Windows Mobile platform. Moreover, Google's online consumer and business applications "" which are mostly free for consumers and offered reasonably to small- and medium-scale enterprises "" are a threat to Microsoft's Office Suite and other applications.

The Yahoo deal is subject to Microsoft winning favour with the anti-trust authorities in the US and the European Commission "" which had pulled up Microsoft earlier for bundling applications along with its operating system. Privacy groups too are joining issue, because they feel that Google and the Microsoft-Yahoo combine will monopolise and manipulate the online communications marketplace and publishing world. If the bid does pass muster despite the opposition, Microsoft will face the big challenge of integrating two vastly different companies with different cultures.

Still, the synergies between Yahoo and Microsoft "" which the latter thinks are worth at least $1 billion a year "" are real. Microsoft has not been able to get right its search algorithms (which bring in the online advertising revenues that have made Google the Goliath of the Internet space). The gap is wide, as seen from the Comscore December 2007 search results in the US "" Google (58.4%); Yahoo (22.9%); and Microsoft (9.8%). Even the combined entity would thus still fall short of Google's share, so the software giant will want to build on Yahoo's search capabilities.

Yahoo also brings with it its experience in the social networking space with Flikr. Microsoft has invested $15 billion for a minor ownership stake in Facebook. The combination can help the duo tackle Orkut's popularity. And while Google has YouTube, Yahoo Video and Microsoft's Soapbox might be able to garner a decent share of the video market. Besides, services like Yahoo Maps and Microsoft's own Virtual Earth technology will take on Google Earth.

Google, on its part, will have to match the combined might of Yahoo-Microsoft in the instant messaging space. And in the enterprise space, Yahoo's huge data centres could help it meet Redmond's cloud-computing aspirations, and tackle the Google-IBM foray in this space. However, several overlapping services of the Microsoft-Yahoo combine may have to be merged down the road.

In India, the Microsoft and Yahoo combine is bound to create stiff competition in the Rs 230 crore Indian online advertising market, which is growing rapidly. Google, Microsoft (MSN), Yahoo, and AOL have a strong presence in India, but so does Rediff.com, which has been entrenched here for more than a decade. Yahoo has around 1,500 people; AOL has its development and test centre, offshore analytics team and content division; Google has an estimated 3,000 people; and Microsoft currently has around 4,000 employees, which it plans to take to 7,000 over the next three years. Clearly, there will be action on many fronts in the coming weeks and months.