interesting perspective

Yahoo Deal Is Big, but Is It the Next Big Thing?

SAN FRANCISCO - In moving to buy Yahoo, Microsoft may be firing the
final shot of yesterday's war.
That one was over Internet search advertising, a booming category in
which both Microsoft and Yahoo were humble and distant 'also-rans'
behind Google.
Microsoft may see Yahoo as its last best chance to catch up. But for
all its size and ambition, the bid has not been greeted with only
enthusiasm. That may be because Silicon Valley favors bottom-up
innovation instead of growth by acquisition. The region's investment
money and brain power are tuned to start-ups that can anticipate the
next big thing rather than chase the last one.
And what will touch off the next battle? Maybe it will be a low-power
microprocessor, code-named Silverthorne, that Intel plans to announce
Monday. It is designed for a new wave of hand-held wireless devices
that Silicon Valley hopes will touch off the next wave of software
innovation.
Or maybe it will be something else entirely.
No one really knows, of course, but gambling on the future is the
essence of Silicon Valley. Everyone chases the next big thing, knowing
it could very well be the wrong thing. And those who guess wrong risk
their survival.
That is why, in this silicon-centric economy, front-runners do not
stay front-runners for long.
Many big names of the 1980s - Commodore, Tandem, Digital Equipment and
MicroPro - are in a graveyard shared by the highfliers of the 1990s -
the At Home Network, Netscape and Infoseek, to name a few.
Now Yahoo, founded by Stanford graduate students who became media
darlings and instant billionaires after an exhilarating initial public
offering of stock, may be the next to disappear.
And Yahoo, which is based in Sunnyvale, Calif., is only 13 years old.
Microsoft wants to buy the company for $44.6 billion as its way to
compete with Google, the hot company of this decade, which was also
founded by Stanford graduate students who became media darlings and
instant billionaires after an exhilarating initial public offering.
"This is the very nature of the Valley," said Jim Breyerof the venture
capital firm Accel Partners. "After very strong growth, businesses by
definition start to slow as competition increases and young creative
start-ups begin to attack the incumbents."
The economist Joseph Alois Schumpeter had a name for this principle of
capitalism: creative destruction. Perhaps nowhere does it play out
more dramatically - and more rapidly - than in Silicon Valley, where
innovation unleashes a force that creates and destroys, over and over.
Microsoft, at the still-young age of 32, is making its largest
acquisition because it, too, is affected by this force. Founded in
1975, Microsoft has had a longer run than most tech companies largely
because it became very good at chasing the next big thing: an
operating system, point-and-click computing, software for servers, Web
services, video games, and, most recently, Internet search and online
advertising.
Technological innovation may not have always been what gave Microsoft
the edge. It has been frequently criticized for me-tooism and for
getting it almost right the third time. Sometimes, marketing skill and
bullying were it's keys to its success.
Microsoft won huge business battles, starting with its domination of
personal-computer software against Apple during the 1980s. A decade
later, it made quick work of Netscape Communications, which
popularized Web browsing in the mid-1990s.
While Microsoft remains very profitable because of its lock on desktop
software, its efforts to dislodge the Valley's leading
third-generation Internet company, Google, have so far failed.
Google's central innovation, Internet search, has confounded
Microsoft, despite investing billions in both technology development
and numerous smaller acquisitions. Internet technology has overtaken
the PC desktop as the center of the action, as people increasingly
view the computer as merely a doorway to their virtual world. Google
calls this phenomenon "cloud computing."
Google, based in Mountain View, Calif., has been setting up giant data
centers around the globe. It benefited from the software innovations
of hundreds of nimble garage start-ups to develop programs that reach
millions of users over the Web.
It has unleashed the power of 'free' to endear itself to a new
generation of computer users with services they find they cannot live
without, like e-mail, digital video and social networking.
Now Microsoft is trying to make up ground by buying what it has not
been able to build. To many technologists and entrepreneurs here, the
deal does not indicate any imminent threat to the Valley's start-up
culture or suggest that the region might go the way of Detroit; it
underscores the health of the heartland that has produced waves of
ever-more powerful technologies for more than half a century.
There is a sense here among investors that Microsoft, as a more
effective counterweight to Google, might actually serve to spur
innovation in the Valley.
"When Microsoft was in the ascendancy, there were whole areas of
investment that were of less interest to investors," said William R.
Hearst III, an affiliated partner with the venture capital firm
Kleiner Perkins Caufield & Byers. "Now you could enter a new area and
people will think that maybe one of the two colossuses will be
interested in acquiring your start-up."
Innovation has been the driving force of Silicon Valley, and the
results over the last quarter-century have been stunning. More than a
billion personal computers are in use around the world. Cellphones are
in the hands of three billion people. The next generation of mobile
computers appears destined to reach another two billion people in just
six more years.
The productivity gains from these devices have driven the world's
economy to faster economic growth and a higher standard of living for
an ever-widening swath of the world's population.
If Microsoft acquires Yahoo, some executives said, the question is
whether it will shake its obsession with catching Google (unlikely!)
and instead look to the next generation of the Internet, even if it
threatens Microsoft's dominant position in PC software.
The bid for Yahoo "underscores how Microsoft's hold on the personal
computer desktop is meaning less," said Nicholas Carr, author of "The
Big Switch," which describes the consequences of Internet computing.
In that sense, Microsoft may in a situation identical to the one faced
by I.B.M. in the early 1980s. Dominant in the mainframe business and
threatened by PCs, I.B.M. responded by quickly becoming the largest PC
vendor.
However, despite all of its manufacturing proficiency, the PC business
was far less profitable and I.B.M. was unable to make that business
work. It took a wrenching cultural change and the shedding of its
management and tens of thousands of employees to regain its footing.
Ultimately, Microsoft's challenge in making its new acquisition work
will be a cultural one. Can the giant software maker - which,
incidentally, is based in Redmond, Wash., about 850 miles from Silicon
Valley - use a huge acquisition to tap into what makes the Valley
tick? Will it force Microsoft to look forward instead of backward?
To many, these questions frame the challenge that Microsoft confronts.
"To a large degree, it's the willingness to move on and abandon
something," said David Liddle, a venture capitalist at U.S. Venture
Partners. "It's that ability to let something go and move on to the
next big thing."

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