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Beyond Search and Advertising

If Microsoft purchases Yahoo, the popular Internet property would contribute a lot more than ad revenue.

Last week, Microsoft made an unsolicited $44.6 billion offer to buy Yahoo. According to its website, Yahoo is still reviewing the bid, and the offer has generated a flurry of speculation about the possible results, including a statement from Google that raises the possibility that a Microsoft purchase of Yahoo could lead to unfair competition. Some experts say that Microsoft is after more than just the obvious–increased market share in online search and advertising–and point to other assets in the Yahoo portfolio.

Charlene Li, an analyst with Forrester Research, thinks that, in addition to Yahoo’s search and advertising capabilities, its social and mobile technologies play “a significant role” in Microsoft’s interest. She points especially to Yahoo’s ownership of social-computing powerhouses Flickr, a popular photo-sharing site, and del.icio.us, which started a trend of social bookmarking. “These are great brands, and centerpieces for how people interact with each other,” Li says. She adds that part of the appeal of del.icio.us is the social search it empowers, since tags that users add to pages give an additional way of determining those pages’ relevancy. “It’s a democratization of [key Google ranking software] PageRank in many ways,” she says. Li also notes that Yahoo’s Go Internet portal for mobile phones could be appealing to Microsoft. The Yahoo interface might complement Microsoft’s Windows Mobile operating system, she says, which, in her opinion, still lacks a good user interface.

Lawrence Ricci, an industry consultant who specializes in embedded systems, says that he thinks Yahoo properties like Flickr are attractive to Microsoft in part because they could be closely integrated with devices such as digital cameras that use Microsoft’s Windows Embedded operating system. “I suspect that one of their motivations is, they want to make sure that everyone who has a Microsoft embedded device will have access to the services that they need to make that device come alive,” he says.

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.

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