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It is a multi-billion deal that will transform cyberspace. But days before news of Microsoft's US$44.6 billion ($56 billion) bid for Yahoo became public, there were few signs that Bill Gates was about to unveil an acquisition that would transform the company and pose a major threat to
Google, arguably the greatest success story of the internet age.
The Microsoft chairman was in London recently, addressing a gathering of businessmen at an upmarket London hotel, where he showed off the company's latest gizmo: Microsoft Surface, a whizzy new PC that sits inside a desk rather than on top of one.
As he spoke, Microsoft president Steve Ballmer was finalising its audacious offer for Yahoo, the internet search engine that has learnt to live in the shadow of Google.
The two companies have talked about forging an alliance before, but now Yahoo's flagging share price has presented Microsoft with an opportunity to buy the company outright.
If its bid is successful, it will plug a gaping strategic hole at Microsoft.
The short-term goal is to create a powerful alternative to Google by merging Microsoft's search engine, MSN, with Yahoo, grabbing a slice of the rapidly growing US$40 billion internet advertising market.
Google is the undisputed leader in the lucrative search market, with a 56.3 per cent share in the US and an estimated global share of close to 75 per cent. Yahoo has 17.7 per cent, but leads Google in some countries, mainly in Southeast Asia.
Google made US$11.6 billion in 2007 from advertisers. Andrew Frank, an analyst at US research group Gartner, said: "It has been on Microsoft's agenda to do something about Google's dominance of the search market for a while.
"They've decided that growing organically isn't working. Plan B is to combine the second and third-largest search engines to make a concerted run at what is currently a one-sided market.
"But there's much more at stake here than search. It's about realising the company's vision of where it wants to be."
Gates wants to protect Microsoft's business model in an era when internet giants are morphing into media companies, offering everything from news to email, films and music, and charging advertisers a premium to reach a growing number of users.
"We see Google as a search business, but it is a media company that makes all its money from advertising," says Peter Rowell, chairman of boutique investment bank Regency Associates, a British technology specialist.
As the internet becomes available on mobile phones and television, that market will explode; Microsoft expects it to grow to US$80 billion by 2010.
"Microsoft is trying to become the equivalent of an online search and content supermarket where users go for their every online need," says Aleksandra Bosnjak, an analyst at StrategyEye Digital Media.
That represents a seismic shift for the company, which makes most of its money from software. "Essentially, they are engineers," says Rowell. "This deal would transform their existing business model."
In London, Gates explained that companies were likely to use the internet to store more information online, removing the need to buy and maintain their own expensive servers. Microsoft and its competitors want to charge them to host that data, but that is just one example of change.
Computer programs are constantly evolving online, many becoming available free of charge.
The implications for a company that licenses software are alarming. Buying Yahoo would give Microsoft access to the expertise needed to address these changes, and a culture of innovation that some claim it lacks.
The deal may not happen. Some observers say Microsoft's offer undervalues the company.
There is also a regulatory threat hanging over Microsoft's attempts to expand.
"Try not to get sued by anyone, particularly your own Government," Gates remarked sardonically in London when asked if he had any advice for budding entrepreneurs. The American authorities have treated Microsoft leniently since abandoning a bid to break it up in the Clinton era, but the EU competition authorities have been less pliable, fining the company last year.
If Gates buys Yahoo, he will have transformed the company he created - preserving his legacy, and ensuring that his status as the world's most famous geek is secure.
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