Why Microsoft Is Desperate for Yahoo!

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Yuriko Nakao / Reuters

Microsoft Corp Chairman Bill Gates

There are a ton of great jobs in the world, but running Microsoft? No thanks. I'd rather run Iraq.

Microsoft is under assault in every direction, and losing the battle on any number of fronts. That's why it's so desperate to come to terms — any terms — with Yahoo. The software giant went back to Yahoo yesterday to suggest a joint venture that would give Microsoft a position in Yahoo's search business. We're supposed to believe that Yahoo — thanks to Carl Icahn's proxy battle to replace Yahoo's board — is feeling the heat. But it's Microsoft that has everything to lose here. The barbarians are at the gates, and Gates (as in Bill) has gone off to serve humanity. Without a search strategy that works — and with Yahoo potentially linking up with Google, a partnership that is expected to be announced in a few days — Microsoft is an empire in rapid decline.

Let's start with its core competence, operating systems. Vista is a disaster and Windows 7, its successor, is two years away. By then, the market for desktop/laptop operating systems will be smaller, perhaps dramatically so. The sweet spot is steadily moving away from "computers" to mobile devices — phones, mainly — and Microsoft's mobile operating system has never captured anyone's imagination, let alone the market. (In its first quarter of existence last year, Apple's iPhone overtook Windows Mobile.

With iPhone 2.0 and a variety of Google-Android-powered cell phones set to roll out, it's not going to get any easier.

I could go on and on, ticking off the things that Microsoft needs to fix. But Kevin Johnson, president of the company's platforms and services division, does a far better job than I could. He oversees the 14,000 people who work in the Windows and online divisions of the company. He took over the job three years ago, which means that Vista is his baby. In a memoto employees Sunday that touched on the latest Yahoo overture, he admitted that Microsoft's search biz has stalled: "The fact is that we are not where we want to be in this business yet and we've been in this position longer than we'd all like."

Johnson lays out four things the company needs to do, which you could pretty much boil down to this: Figure out a way to combat Google. He alludes to a "major new initiative" the company will be announcing at an annual advertising conference in Redmond later this week. The initiative, he promised, will "innovate and disrupt in search." Good luck with that, but at this point even a Yahoo acquisition might be too late.