It's only $44.6 billion...

The week started with a fizzle - QTrax and its game-changing announcement that ended up as 'how could they be so silly?' hangover - and is ending with a...
Written by Rupert Goodwins, Contributor

The week started with a fizzle - QTrax and its game-changing announcement that ended up as 'how could they be so silly?' hangover - and is ending with a... well, let's wait and see.

Let's get the technicalities out of the way first. Microsoft has effectively bought Yahoo; heaven only knows how they arrived at the exact $44.6 billion offer rather than $40 billion or $50 billion, but it's so far in excess of Yahoo's market value that the shareholders are going to exercise their TTM&R (Take The Money And Run) option. It's an offer you can't refuse - backed up by the language in Ballmer's letter that makes it clear that if it is refused, MS is going to get nasty. It's an FU (oh, you work it out) offer, in the vernacular.

There are rumours that Murdoch is running around looking for enough pals to stage a counter-bid, but that's unlikely. Which means that Microsoft is paying far too much, by ordinary standards. But Microsoft has a rather low opinion of money: familiarity has bred contempt.

Microsoft has a huge pile of cash. It's making more. It has tried to turn that cash into good new business by investing internally - XBox, Windows Mobile, Live - but it's not seeing ROI on any of that stuff.

But while it doesn't care that much for money - money hasn't bought it love - It knows that the way it makes money will stop working in the end, and it doesn't like that.

You, me and Steve Ballmer have spotted that nobody's going to keep paying hundreds of dollars on demand for new versions of Windows OS and Office. We don't see ROI. As for ever cleverer versions of Server and all that good IT infrastructure stuff: the belts are tightening up all over Europe, and cleverness is going to mean doing more with less. That's not compatible with 70 percent margins.

So, Microsoft knows that investing its cash in its own ideas hasn't worked so far. It knows that Yahoo can deliver the most eyeballs (to use a very ancient term) of anyone on the Net. The bet it's making is that if it can snag enough people - and it's paying something like £600 per user with the Yahoo bid, even though the vast majority of these will already be Microsoft customers -- it can build online dependencies that will replicate its old lock-in model, where people didn't move because it cost more in the short term than staying, to a new one, where people only use its services because... um...

It's here that I run out of imagination. I can think up any number of scenarios for the future of web services, mixing in advertising, media delivery and all the rest, and I don't claim to know the winning recipe. But they all exist in a far more competitive environment than Microsoft's core revenue generators do at the moment, and none of them change that much if Yahoo and Microsoft share the same offices.

I simply can't see $44.6 billion dollar's worth of upside. MS has lost a competitor, is the best I can do.

The downsides, now, those I can see. They range from the enormous challenge of merging two very complicated companies (MS has plenty of organisational issues but is nowhere near as byzantine as Yahoo, people who know both companies tell me) to the regulatory crapshoot, as well as the technical side of combining so many similar services. These are hard problems that'll take a lot of clever people a long time to get right, time in which Google's clever people will be free to solve hard problems that actually bring in new revenue.

You don't get an Olympic gold medallist by taking the silver and bronze runners and tying their legs together.

The deal's not done yet, the global economy is being truculent (if you think the media's being gloomy, you should hear the economists. They're talking in terms of the sixty-year superboom ending) and even if everything works out nothing will happen until much later in the year.

Fun to come.

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