Bill Gates has kept out of the public eye on Yahoo, leaving it to Steve Ballmer to lead the charge. So it was intriguing to hear him talk about the situation when I spoke to him on Monday (the conversation had been arranged to discuss Microsoft’s decision to give away its developer tools to students, but how could it not turn to Yahoo as well?)

With Microsoft and Yahoo apparently waiting to see who blinks first (Is a Yahoo alliance with Google or News Corp really just a bluff? Will Microsoft sweeten its bid?) Gates was not about to negotiate in public. But he talked fairly freely about competition with Google.

Two things struck me. One was that this was a very subdued Gates, certainly when you think back to the fighting talk when Microsoft first set out to try to dethrone Google.

“Google is currently by far the leader in search and search ads - they have a very, very high share,” he conceded. Faced with that, Microsoft only had two options: to throw in the towel or try to catch up. And if you think about other situations where a software company with a number one position in its market has lost its lead, ”virtually all of those examples are where Microsoft got particularly serious about it.”

All of this was delivered very matter of factly. There was no bluster, no attempt to claim that a Yahoo deal would put Microsoft straight back in contention. It almost felt like a concession that the search game has already been decided, at least as currently defined: if a combined Microsoft/Yahoo have a chance against Google, it will be in whatever game comes next. Mobile search? Something else?

The other striking thing was that, whatever Microsoft says about the attractions of bringing in more engineering talent from Yahoo, Gates certainly left the impression that that is not what this deal is about. He paid lip service to Yahoo’s engineers, but also said Microsoft had the depth of skills to undertake this fight on its own.

Microsoft believes it knows software. But if it was simply a case of matching Google’s technical prowess it would already have done a better job of catching up on its own. What Microsoft doesn’t have are the brand, the audience, the traffic, what Gates called Yahoo’s ”market position.” For once, Gates seems willing to admit that what he likes to call ”the magic of software” is no longer, on its own, enough.

February 19th, 2008 in Internet | Permalink