Rob Koplowitz, who is, like Li, an analyst with Forrester Research, says that some of Yahoo's technological expertise could help Microsoft keep its Office products competitive. Challenges to Microsoft's flagship product have come recently from Web-based productivity services such as Google Docs and IBM's Lotus Symphony, offered either free or at extremely low cost. At the recent Lotusphere conference in Orlando, FL, Michael Rhodin, general manager of IBM's Lotus division, said that the company plans to compete in part by changing how it develops software. "We will be very aggressive as to how our services are priced," he said at a press conference. He added that Lotus would provide small-business services such as Symphony, "so people won't have to spend $400 a user on a word processor."

Although competitors have yet to take a significant part of Microsoft's market share, Koplowitz says that the company has begun moving to protect its lucrative Office products. "It's a core strength of Microsoft, how seriously they take their competition," he says. The company has started adding online services to Office, in an attempt to take advantage of the benefits of online services while maintaining the comfort of the desktop for its longtime users. Yahoo's engineers, Koplowitz says, could bring extensive experience at delivering Web-based services to bear on the problem, as well as their expertise at building efficient data centers. "If we're really moving to a model where more and more software is being delivered through the cloud, it's probably not going to be a high-margin business," he says. "The ability to do it efficiently at every level will be a differentiator."

Li notes that, even if the offer goes through, the deal is unlikely to close before the final part of this year, at the earliest. She says that it's likely that the companies would focus initially on advertising and search, followed by easy integrations such as combining instant-messaging clients and the two companies' news coverage. She thinks that Microsoft would only be able to focus on properties such as del.icio.us once those earlier matters were resolved.