I wrote an article for Kelly Letter subscribers last week explaining how both Google and Yahoo are racing to deliver online alternatives to Microsoft Windows and Microsoft Office.
Google Docs is already pretty far along toward replacing Office, but the much bigger fish for the future will be a freely downloadable internet based operating system that can replace Windows.
That article could not have been timelier.
Indeed, Microsoft was so concerned about the internet threat that it made a bid to buy Yahoo for $42 billion last Friday. Prior to that, the largest acquisition Microsoft ever made was online ad company aQuantive for $6 billion last year. The huge offer for Yahoo shows how serious Microsoft feels about the internet's role in its future.
The cash-and-stock offer was worth $31 per share of YHOO as of Thursday's close, but only $28.95 per share as of Friday's close because shares of MSFT fell on news of the bid.
This changes everything.
My thinking on Yahoo for the past two years has been that it would command as much of the growing online advertising pie as Google. The online ad market in 2007 was about $40 billion. Because more people are getting more of their information online, online ads are on trend to hit $80 billion by 2010.
Yahoo has made great strides forward since 2004 when Google hit pay dirt with its fantastic ad system. Yahoo overhauled its own advertising platform with a new one called Panama that's doing well. It increased overall traffic and is the most visited online name. It made smart acquisitions including Flickr, the web's most popular photo site. It also snazzed up all of its properties, most notably Yahoo Mail and Yahoo Finance.
What it did not do was take search market share from Google. To this point, that's about all Yahoo has left to focus on and it's focusing on it very hard.
What I posited last week was that both Google and Yahoo had their sights set on delivering the world's first internet based operating system alternative to Windows and other hard-drive based operating systems. The first company to bring that to the world stands to unseat Microsoft from its dominant position at the center of computing, control most of the online ad market and, indeed, become to the internet what Microsoft has been to the hard-drive based personal computer.
While I felt it was too soon to say whether Google or Yahoo was farther ahead in the effort, I was willing to continue betting on Yahoo because of its cheap valuation. Part of the reason is now abundantly clear. Even if Yahoo couldn't make it on its own, it was a fabulous takeover candidate.
The Kelly Letter owns both Microsoft and Yahoo, and did well overall on the news. MSFT dropped 6.6% but YHOO gained 48%.
Microsoft has not purchased Yahoo yet. We need to be clear on that. It made a bid. Yahoo did not offer itself for sale.
