Microsoft's software-plus-Yahoo! play
For a couple of years now, Microsoft has been talking up the notion of 'software-plus-services', which is its inelegant and self-serving way of saying that, although people are doing more and more on the Web, they're still going to have to buy software. The underlying purpose of this message is to reassure employees, partners and stockholders that a) Microsoft's cashcow software business isn't going to get displaced by Web-based equivalents; and in fact b) Web-based services represent a completely new incremental growth area that Microsoft can expand into. It's all bunkum as far as I can see — I'll explain why in a moment — but if it's what you want to believe, it seems to make sense.
In the software-plus-services world, buying Yahoo! makes a lot of sense, because it significantly bolsters Microsoft's presence in the emerging Web-based services segment. Yahoo! is already one of the big players here. People are not quite convinced that it's got the right strategy, but then the same is true of Microsoft's own Web-based services play, so maybe if they merge these two wrongs, they'll make a right.
Yahoo! has some great Web 2.0 services that it hasn't gotten around to monetizing yet, such as Flickr and del.icio.us. Microsoft, on its side, has some SMB-targetted services such as Office Live, which it has begun to monetize but which aren't great. Yahoo! has a decent presence in hosted email, especially in the education market, which with its acquisition of Zimbra it has every intention of expanding and building on. Microsoft has Exchange, Sharepoint and Office, and is trying to figure out how these software products mesh with services. Yahoo! has a contextual ad targeting engine that promises (but has not yet delivered) even more (on both counts) than Microsoft's own version of this technology. There are all kinds of synergies of one kind or another.
Most important of all, though, is that Yahoo! only does services, while Microsoft does mostly software. Put the two together and you have the most awesome software-plus-services play. At heart, that's the rationale for buying Yahoo! It gives a huge boost to the services side of Microsoft's software-plus-services strategy.
The flaw in all this is that no one else defines the world in the same software-plus-services paradigm. The mainstream media analysis of Microsoft's move on Yahoo! says that it's all about going up against Google. But Google is the antithesis of software-plus-services. Google is pure services — just like Yahoo! Neither of these companies (nor Amazon, nor eBay) go around selling software as their primary offer, plus a few services tacked on the side. Sure, they use a huge amount of software within their infrastructure, but they use it to generate services. It's not software-plus-services, it's software-powered services.
The attempt to define software as somehow separate and parallel to services is what exposes Microsoft's software-plus-services notion as bunkum. Software is the stuff that powers services. Before the Web existed, the easiest way to get those services was to install a software package. Now that the Web exists, the easiest way to get those services is to click a link and let someone else run the software. That's what Google does. That's what Yahoo! has always done. These companies aren't doing away with software; they're huge consumers of it. When Salesforce.com talks about 'No Software' what it really means is 'Lots more software, but we'll take care of it for you.' The software becomes part of the service provider's infrastructure.
What Microsoft has got wrong is that it still wants end user individuals and enterprises to buy software and run and manage their own servers. That way it still gets to sell lots of software licences, and sustains its existing partner channel and business model. Its software-plus-services mantra is a way of steering customers and partners away from the service provider model, away from adding credence to Google, Yahoo! and all the other service providers out there. It wants to pretend that service providers are just an add-on activity and that most software will still be bought and installed by enterprises and individuals. If it really wants to secure its future what it should be doing is making sure that service providers install its software inside their infrastructure instead of someone else's.
It would be a breakthrough moment if Microsoft were to use its purchase of Yahoo! to transform itself into a next-generation software-powered services company that also, as a sideline, sells infrastructure software to other service providers. But Microsoft doesn't want to concede software as being subsidiary to — a component of — services. So instead it will corrupt Yahoo! into a company that exists to foster sales of Microsoft's software; a company that looks back to the past rather than forwards to a true services future. And Microsoft will have squandered its $44.6 billion on a quixotic mission.