I’ve got to hand it to Ballmer. He has the tenacity of a master salesman. You know, the kind of guy you grudgingly buy from just to get him to go away. Mr. Steve seems to be convinced Microsoft lacks the needed recipe to bake it’s own internet operation, so the company that tried to buy Yahoo without success is still on the hunt for internet properties. Undaunted by the lack of any synergies, MS is now looking at hooking up with AOL.

Microsoft is meeting with AOL executives Wednesday to talk about the two companies combining AOL and Microsoft’s online division, according to a news report.

Microsoft, spurned in its recent efforts to buy all or part of Yahoo, wants to explore ways to combine with AOL, according to the Wall Street Journal. The two companies have been discussing a possible deal for months as an alternative to Microsoft buying Yahoo, the Journal reported in its online edition Wednesday afternoon. (The Industry Standard)

Free advice for Mr Ballmer. There are plenty of very bright folks at Microsoft who could create a real internet business in house. The problem is the company’s culture. Any new business that seems to minutely threaten an existing one gets buried. It’s the sort of culture that dooms trying to do anything on the level of Google. Change that culture and you can do great things. That’s also what makes joining forces with AOL a very bad idea. AOL suffers from the same cultural defect.

Just when it looked like the Microsoft deal was buried, here we go again. It looks like Ballmer has been talking to Icahn. Which kind of brings back memories…. Like we have said all along till the Suits are being talked to nothing would happen. Now the big question is how much is the Yahoo board in Yang’s back pocket?? –

In a letter to Yahoo’s board, Mr Icahn, said he had spoken “frequently” to Steve Ballmer, Microsoft’s chief executive, in the past week, in conversations that “lasted as long as an hour”.

Microsoft said that, with another board in place, it would be interested in discussing a deal either to assume Yahoo’s search function “with large financial guarantees” for the internet company, or to buy Yahoo outright.

The earlier offer for Yahoo’s search business, in which Microsoft would have taken over the service and paid a percentage of the advertising money it received to Yahoo, did not include any revenue guarantees for Yahoo.

Yahoo said it was open to negotiating an offer from Microsoft but that, after an overture of its own last month, Mr Ballmer had said he was “no longer interested even in the price range [Microsoft] had previously indicated.”

Turning Yahoo over to Mr Icahn so that he could sell the search business to Microsoft “at a price to be determined in a future ‘negotiation’” would not be in the best interests of shareholders, it added.

It now starts to get interesting. If Yang cannot keep the board intact then he is cooked. His hold on them is highly dependent on how much holdings many of them have in Yahoo itself. Oh and what is the comp package for Yahoo board members. They would lose all that in a Microsoft take over.

For the industry, like we have said before, its not a good deal. From Microsoft’s perspective yes they gain a search engine presence as Yahoo. That might be in doubt if rebranded as Live Search. Then the consequent brain drain as developers jump ship. Don’t forget that one. If I were a MS stockholder I might question the buy as paying a premium for something that will be highly devalued in a year.

This latest gambit might be the end of Yahoo.

Linky

Thirdpipe has been espousing for about a year now that the landscape of computing was changing. Most of which was enabled by what broadband services we have in place. Sometimes it feels like being the lone tree falling and asking the question — did anyone hear us fall? Well evidently that is the case –

This week marks several important events:

• Google announced their broad Web-as-a-platform developer toolset.

• Microsoft showcased part of their Windows 7 user interface and set the date for their PDC which indicates their new OS, Windows 7, is approaching Beta.

• In addition, I and a number of the folks I work with are seeing what appears to be a rather massive move to the Mac platform, which hasn’t seen this kind of growth since the 80s.

• Finally, Linux is beginning to get some actual traction, showing up on a number of low cost “Netbook” offerings and MID (Mobile Internet Devices); it is starting to look like even this platform may have some legs.

I have not seen this level of competition before and Microsoft has never appeared more exposed. In my lifetime I have never seen a major vendor allow the kind of attack-marketing Apple is using without challenge. And, coupled with initial problems with Windows Vista, Microsoft suddenly looks like they are in a fight for the desktop the likes of which they – and we – have never seen.

The market and its users are making a shift. Right now CPU power is the number #1 criteria. However that is rapidly being supplanted by mobility currently at number #2 on the ;user preference list. Laptops displaced desktops in sales several years ago. Now UMPC’s are coming on strong with tools like the eePC. That mobility is favoring OS’s with a small footprint and whose technical ecology can transcend across multiple platforms. Only two systems can do that — Linux and Google Desktop.

Regardless of the snaz factor for Windows 7 it will represent the evolutionary pinnacle of an waning genera of computing.

Linky.

My career in IT started pre-Internet so I have seen much of the history unfold with a near 50 yard line seats. But I have to ask does Microsoft really ‘get’ the Internet. This discourse pops up from time to time on the tech blogs. But now I have detected three events that tend to indicate a trend.

But do I need to remind folks we have sort of been here before? When the ‘Net burst on the scenes in the late ’80’s it was novel and a user supported affair. But it was not long before the NCSA browser was adopted by Netscape and off to the races. For well on 18 months Netscape had free reign in the marketplace with Microsoft sitting on the sidelines oblivious to the paradigm shift. Eventually they recognized the threat and developed IE.

Now? Well its what Microsoft is doing rather than not doing this time. –

A) The Yahoo non-assimilation. We have covered the Yahoo - Microsoft dance several posts. I won’t elaborate too much. Then rumors floated of a possible Microsoft - FaceBook match up. All these moves appear to be an effort to develop a ‘Net income producing presence separate from the desktop metaphor.
 
B) Shutting down the book search engine effort. We then get this from the blog Google Operating System.

“Given the evolution of the Web and our strategy, we believe the next generation of search is about the development of an underlying, sustainable business model for the search engine, consumer, and content partner. For example, this past Wednesday we announced our strategy to focus on verticals with high commercial intent, such as travel, and offer users cash back on their purchases from our advertisers.”  

In other words, the book search engine didn’t make enough money and Microsoft decided it’s better to focus on areas that are more profitable. Instead of improving their search engine with valuable content from books and offering better search results, Microsoft chose to make decisions based on the short-term profits.

C) Removing unpopular XBox games from the download site. Then from Wired we have this —

What on Earth is Microsoft thinking?

Consider the case of Asteroids Deluxe, above. Maybe it’s not the most popular game on Xbox Live Arcade, but surely there are some people out there who want to play a high-def version of Atari’s classic shooter, right? Last I checked, that was the whole point of digital delivery: You don’t have to only publish the hits. Zero cost of goods and just-in-time inventory means that you can sell a little of a lot of different things.

So why is Asteroids Deluxe in danger of being yanked from the Xbox Live catalogue?

Xbox Live general manager Marc Whitten told Next Generation this week that Microsoft will soon begin to delete some Xbox Live Arcade games from the service. The rationale is, to put it nicely, paper-thin: To “focus on quality over quantity” and “make it easier to find the games you are looking for.”

That is, Microsoft is going to reduce digital download games choices. That would be like iTunes dropping ‘By the Dock of the Bay’ because Sam Cooke only sells 2 tunes a day. But that is what Microsoft is preparing to do.

So what do all these events have in common? Short quarter thinking. Its the only thing that makes any sense. But let me lay the ground work for why.

Consider the games reduction. It makes no sense. The sunk cost for housing the games for download has already been paid. So even if a game only does 5-6 sales a week it is by this point nearly pure profit both for Microsoft and the game developer for their royalty payment. I would recommend the book the ‘Long Tail’ by Chris Anderson for a full explanation. But non-physical goods to do not incur warehousing costs like physical products so their retention does not impact the bottom line. Then we have Microsoft backing out of the book search concept. Ok granted it takes expense to keep feeding the machine but as a competitive move for LiveSearch its a bad move. It leaves the the concept totally to Amazon and Google. That indicates a brand retreat to consumer. Finally we have the Yahoo deal. It is interesting that Microsoft felt compelled to buy a revenue stream when there were supposed to be constructing one with LiveSearch. Now I will grant that sometimes it is cheaper to buy into a market than build your presence in that market from the bottom up. The Yahoo thing had a aura of desperation to it. It never made sense to me that Microsoft was going to battle the boardroom without the backing of the institutional investors first.

The conclusions? –

• Microsoft’s acumen outside the desktop/server environment lacks insight and in many cases is too much ‘me too’ in scope.
• Its ability to generate revenue is below that of its competitors. That is evidenced as part of the first bullet point.
• Microsoft’s pull back over these markets and its move to buy market may indicate a revenue shortfall and likely short term bad quarters for the giant for the balance of the year.
• Unable to get these revenue streams to a break even point Microsoft faces some tough choices. Couple that with all is not well in the desktop arena regardless of the rosy Vista projections. The Windows margins have been shrinking for two quarters now.

The bottom line? Is Microsoft the next Novell, like Novell was in 1995 having been speared by the Microsoft juggernaut in the server market? Wish I could ask THE question — “Bill did you know 3 years ago when you handed the COO job to Balmer that the franchise was running out of steam in the marketplace?”

I’ll put the crystal ball down now. Anyone have any other explanation for the events I have just outlined? I am all ears!

The spin from the Windows Live group in Redmond is that this is getting cash back for purchases initiated through search. The devil’s in the details. I believe this will end as more of an assault of shopping engines than search engines. Google pretty much started that assault with Froogle, that’s now consolidated into their main search and shopping.

The program in partnership with eBay and its PayPal unit will offer cash back to consumers who search on Microsoft Live and make a purchase. The announcement will be made in conjunction with a taped message from eBay CEO John Donahoe. The technology is based on the acquisition of Jellyfish by Microsoft in September, 2007.

The announcement is expected to be made by Satya Nadella, SVP Search, portal & Advertising Platform Group, Microsoft, prior to Bill Gates’ presentation on “Connecting the Future.” The goal is to differentiate Microsoft’s vertical search experience for users while leveraging improvements in the core search algorithm.

Microsoft believes the Live Search Cash Back program will align the interests of consumers and the search engine, putting Microsoft “on the same side as the consumer.”

The job of Live Search will be to match the most relevant products with the most relevant consumers.

Microsoft will likely offer advertisers a CPA (Cost-Per-Acquisition) model rather than a traditional search engine Cost-Per-Click (CPC) auction. (Search Engine Watch)

Time will tell if the same old Microsoft brute force strategy will work against Google. The fact that Google’s established business model is the one Microsoft is attempting to adopt, without the accompanying revenue stream makes it an uphill battle. The fact that Google search just plain works better than Live Search is another. If I were an MS shareholder, I would question why MS needs so badly to be in this business.

At least the author of this piece thinks so here. To be quite honest, I have thought many in the IT business have infantile minds so maybe HS is a valid observation. Be that as it may, Ballmer having been rebuffed by Yahoo is now gunning for FaceBook? —

Which seems exactly the way to view the action these days around the Microsoft-Yahoo ordeal. Today’s news: Steve Ballmer has put out “feelers” about buying Facebook in the wake of ending his pursuit of Yahoo. Let’s parse the Reuters story with this perspective in mind.

Microsoft gauged Facebook’s interest in a possible acquisition after the software giant’s failed takeover attempt of Yahoo, the Wall Street Journal reported Wednesday. Steve, frustrated and hurt after being spurned by Yahoo, got out the yearbook, found the most popular girl of the moment, and decided to go for her whether he really wanted to or not.

The newspaper reported on its website that Microsoft’s bankers put out subtle signals to Facebook, the social networking website, to see if it would be open to a full acquisition. Steve didn’t want to be rejected again, so he got his friends to feel out her interest.

So one has to ask what is Microsoft’s motive for either of the acquisitions? The Yahoo attempt made some sense as they had a revenue stream and a vehicle for internet ad space. But Facebook? Yes they have some of the largest eyeballs on the planet but their revenue architecture is leveraged by Google/Yahoo. Were MS to use FaceBook and their own service they face a big revenue hit up front before growth is realized by ad buyers to the MS platform. So if MS just hell bent to buy somebody? ANYBODY?

Did Ballmer even earn a ‘letter’ when he was in HS?

Addendum: This posting from the psumptive mouth of Bill tends to confirm my observation of a Buy Anybody mindset. –

From way over in Indonesia, Microsoft chairman Bill Gates let it be known that Microsoft never needed to buy Yahoo to make headway in search and advertising. It just kind of wanted to.

“We have always felt we could do very well on our own and now that’s the path we are focused on,” Gates told AP in Jakarta on Friday. “The standard strategy for us is to just hire great engineers and surprise people at how well we can compete, even with a company that’s got a strong lead.”

Linky.

CNet has an interesting blurb comparing Microsoft licensing cost as a relative cost to per capital income. In the end folks in Brazil pay 19x and homes 15x the relative costs of an American for the same software. Even doing a straight cash comparison the Brazilian pays a 20% uplift to buy the same software.

In line with Duarte’s observation, I’d also suggest another reason: A desire to keep Brazilian Reals in Brazil, rather than shipping dollars back to the United States. Part of this stems from Brazil’s healthy distaste for the United States, but part of it is also just a realization that it’s difficult to impossible to build a thriving software business on the foundation of someone else’s software [PDF].

As I recently argued in Moscow, open source enables economies to develop and flourish on their own terms, not Microsoft’s, Oracle’s, etc. Brazil should not be spending 20 percent of its business income on Microsoft. Doing so cripples its ability to invest at home.

Read the whole thing.

Well now, straight from Fox News — Microsoft walks out on the Yahoo bid. We’ve been saying here that Microsoft has been out of their element on this deal. I say that for this reason. According to a Wired article MS was willing to go as hight as $37/share. More than I would have expected. So the Yahoo board says no by measures not directly associated with the share price. Now if MS has gone to Wall Street with $37 share they might have had a different reception. Remember 84% of the Yahoo Market Cap is held by 10 institutionals. Had they been approached first the Yahoo board would have been cut down.

Now it could still happen. But the matter of trust would be key at this point with th wall street crowd.

“For a merger to work, you have to have good business strategy, a strong operating model with good numbers, and the best people to execute on that model,” said Hewlett-Packard CEO Mark Hurd, at a symposium at Castilleja, a private girls school in Palo Alto, earlier today. “With Microsoft and Yahoo, you’ve got two cultures with very different values and strategies. . . Friendly deals are hard enough to get done. Unfriendly deals are really, really hard to get done.”

And although Microsoft blames Yahoo for its unwillingness to negotiate,this was, in reality, never a deal Microsoft’s own shareholders could get behind: Since Microsoft first went public with its bid on Feb. 1, shares have fallen 10 percent.

Which brings up the question as to Microsoft’s vulnerability in the online space. I would ask, Microsoft has the technical savvy to build a presence. But do they have the business acumen to achieve the goal? And does the Yahoo bid cover a bigger hole on Microsoft’s part in this arena?

It appears that Microsoft has upped its ante for Yahoo above $31/share. The report, provided by AP does not indicate what the $$ amount is. But if Microsoft has upped it to $34-35 the deal will be done. The big stock holder will see to that. They smell profit in the water.

Sadly the AP report has this interesting piece –

The Redmond, Wash.-based software maker upped its offer beyond the original value of $44.6 billion, or $31 per share, according to a person familiar with the matter. The specifics of the new offer weren’t known by this person, who didn’t want to be identified because the negotiations are still confidential.

So the ’source’ does not know the details, only that a higher offer is happening. Sounds shaky so I will take it with a grain of salt. All we can do is wait.

For those that don’t know Microsoft they do not follow a calendar year. Hence Jan-Mar is their 3Q. Regardless it is dismal for Uncle Bill. Profit is off 11% same period last year. Which begs the question is the downturn a reflection of dismal Vista or stupid Yahoo?

Regardless Microsoft is feeling the squeeze. Gross revenues were up a little over a Billion but net margin was down. Delivery of product is becoming harder to do. Couple that with the fact that they can no longer call the shots on standards like they used to in the late 80’s.

More on the financials here.