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It’s about the price… News Corp (NASDAQ:NWS) is in… News Corp won’t play… Microsoft (NASDAQ:MSFT) will destroy Yahoo (NASDAQ:YHOO)…Yahoo isn’t worth more than what’s offered.

There’s been so much commentary on the proposed mega merger, it borders on overwhelming. Anyone with an inkling of insight on tech and an opinion is weighing in while we all wait for the next dose of fact to supplant innuendo. While I wait, one wonder keeps hitting me: is Microsoft’s collective head in the cloud?

That phrasing may sound odd but it’s not a typo. It is meant to be just one cloud – as in the so named concept of Cloud Computing.

As much as web traffic and advertising dominance make an approachable, and rational, near term justification for this deal, there’s also a longer term vision; something more in Microsoft’s strategic vision. Cloud computing, as esoteric as it sometimes seems, could be part of it. Research, sound bytes from the executives themselves and a deeper look into just what this vague concept of computing actually means seems to make for a logical argument:

•What is Cloud Computing: the Background
In the late 90s, Grid Computing was a fast rising buzzword for ideas of applying peer to peer concepts and broader resource sharing within enterprise computer networks. Today, Cloud Computing is sometimes identified as the next incarnation of the same concepts. As a vague buzzword, it could be but it’s largely viewed as something different.

The “Cloud” is a combination of things including software, hardware and data paradigms aimed at providing new ways to access information and connect people and resources. It’s online data, essentially: it is a web based operating system. The cloud is a broad, vividly painted but vague vision where computing leverages connectivity and shared resources to become uber-distributed and ultra portable. It’s the Internet becoming the backbone and infrastructure for our mobile phones, for computer applications, for data storage, for the organization and distribution of all things digital.

A core element of this internet-as-computer concept is Software as Service (Saas) business models. In these, applications are hosted from afar and accessed over the net for a subscription fee (or on the shoulders of advertising). Google (NASDAQ:GOOG) Docs as opposed to a traditional Microsoft Office environment is a consumer example. Salesforce.com (NYSE:CRM) in the business world is another.

A second element of the Cloud concept is data driven, the idea of remote storage for personal or public use. This comes in the form of already existing tools like a web hard drive to share photos (or whatever) with family members and friends (like Box.net). The same result can be had by using the equivalent photo community where you set permissions and interact with those you chose to give access rights to (like Flickr). This remote data concept goes much further: a networked iTunes streaming your music to all your devices. A clearing house for your address books and files. A storage container for anything, and everything, you may want to see but not think, or plan, to have with you. A directory for your phone; data that can be immediately loaded into a new device when the time comes for an upgrade. No redoing phone books. Log in and it’s there. The online data environment becomes a repository for all your personal data, a centralized vault for each single individual.

In a way, in fact, on a data level, the Internet and the Cloud become one and the same: a vast environment of digital information that you can add to, use, pay for, watch, share, store or otherwise interact with. The futuristic aspect is where expansions in Web 2.0 ideas and changing user interface technologies refine how we manage and interact with it.

The goal and dream embedded in the concept is for a world where data and access to it becomes more efficient, more organized and broadly accessible. A world where the info is secure but infinitely accessible to the properly authenticated audience.

The last part of the equation is Hardware as a service (HaaS). There, like the original grid computing paradigm, computing resources can be harnessed and shared on an as-needed basis. Through virtualization, or commercial services like Amazon’s (NASDAQ:AMZN) Elastic Compute Cloud (EC2) or other projects at Sun (JAVA) and IBM (NYSE:IBM), everything from processing cycles and web hosting/service requirements can be rented and used as demand requires. Hardware as a Service presents a dynamic computer environment where resources are paid for as consumed rather than where racks of expensive equipment are bought, amortized and then replaced. Running out of capacity, increase your web hard drive…need less, offload it to somebody else. Forget buying a hard drive that’s antiquated in two years or looks like a cinder block compared to the next generation of micro-sized devices.

•The Cloud As a Battleground for Google and Microsoft
At an enterprise level, risks of data sharing and other access control issues, create special challenges which will lead some companies to want their own clouds; proprietary virtual computing worlds that operate like a generator off the power grid. Companies like Sun and IBM are looking at that and working on solutions (IBM, in fact, just launched a European research initiative with 13 partners aimed at developing technologies for managing computer resources in a cloud. The program is called Reservoir).

Google and Microsoft, in contrast, are battling, or racing, toward a consumer focused cloud. Their executives have said it themselves. In fact, it’s a common ground for Eric Schmidt, Bill Gates, and Google’s CIO Douglas Merrill. All three have been vocal champions of the concept; in their own fashion anointing it as the second coming of the Internet and the face of the future.

Bill Gates made his case this year in the beginning of January. Delivering his last keynote at the Consumer Electronics Show, he stood up and offered his predictions for the future. In his speech, he said his crystal ball showed him a future environment where our electronic devices were all “service connected.” He talked about distributed storage, a world where blackberry thumb and carpal tunnel fade because we find new ways to interact with computers. He said, “We’re at the very beginning of the transformation that software will enable.” Repeatedly, Bill Gates talked about data and applications being hosted “in the cloud.”

Google’s CEO Eric Schmidt expressed similar sentiments almost two years ago. At a Search Engine Strategies conference in 2006, he put a lens on the traditional client/server computing model and said it was changing. In the new environment, Schmidt, who has a Ph.D in computer science, said “data services and architecture should be on servers. We call it cloud computing…. It doesn’t matter [in the new environment] whether you have a PC or a MAC or a mobile phone or a Blackberry or what you have …you can get access to the cloud. He further went on to note “cloud computing and advertising go hand in hand. There is a new model that’s funding all of the software innovation to allow people to have platform choice, client choice, data architectures that are interesting, solutions that are new – and that’s being driven by advertising.”

Doug Merrill’s two cents were disclosed this month, in of all places, a fitness and lifestyle magazine (Men’s Health). In a profile on how he keeps organized, Merrill, who is Google’s CIO, took the opportunity to preach the party line and talk about web search and its value. “When I come across something of interest on the Internet,” he said, “I don’t worry about whether I’ll use it. I just dump it into my personal online cloud. Organization then becomes this loose pole of information that’s growing forever, and you don’t care because every time you ask a question, you get back everything that’s relevant.” Search, he explains in homage to Google’s strength, becomes the key. A good search program makes it easy to find the knowledge in our pack-ratted piles of data. Collaboration fits into the puzzle too. The idea of Web 2.0 and social networking “allows you to leverage your strengths and the strengths of others. Different perspectives yield better answers and better people.” Computing in the Cloud helps enable that further.

•Reading Between Their Lines
So add the thoughts of these executives up and what does it mean: “Advertising and the cloud go hand in hand?” An internet Operating System loaded with applications? Something that could replace the desktop? Search a possible key to managing access? More Interaction? New Interfaces…. even if five years out, or ten, it seems like they’re saying the Cloud is where this arms race is heading.

If true, Microsoft’s effort to make sure they get there first sure makes sense. So does Steve Ballmer’s past claims that advertising will eventually account for more than 25% of Microsoft’s revenue. If they don’t execute and the concept of the Cloud eventually (five, ten or fifteen years from now) replaces the desktop, Microsoft’s business will be yanked from underneath them like the proverbial rug.

In no uncertain terms, the Cloud is being positioned as a race to the moon, a battle between two super powers. It’s an Internet arms race. And it seems to be a future both computer giants are betting on. The key distinction is: they’re approaching it from different perspectives. Google from the strength of search and data storage (indexing the web) and Microsoft from their foundation in application and operating system development.

Microsoft vs. Google: Different Start Points, Similar Ends
Compare Google and Microsoft in this context of the Cloud and the two have very different strengths.

Google has built itself up with search as its foundation. In December 2007, they owned about 62.4% of the global market. (Microsoft in contrast had just 2.9% and Yahoo had 12.8% (via ComScore)). They then leveraged that audience and strength to become dominant in text and contextual advertising. With DoubleClick, they’ll expand into Display advertising. With Android, if it becomes widely adopted, not to mention their small Grand Central purchase, they’ll get a foothold into mobile operating systems.

Where Google has struggled, relatively speaking, is applications. Google Apps including Talk, Docs and their calendaring services are generally feature rich and well liked but they’re not all that significant when it comes to user adoption, at least for now.

Microsoft in contrast, is a titan in the areas of operating systems and applications. Microsoft Office is almost the de facto standard for many of the applications it provides. Windows, in its various flavors, is dominant on the consumer desktop – even in the face of Apple’s (NASDAQ:AAPL) accelerating growth and usage of Linux and other Unix flavors in some areas. Windows mobile, though one of many offerings in the market, has a solid foundation too. And now the purchase of Danger Inc. just the other day threatens to expand its functionality more deeply into mobile web connectivity and interaction. Unquestionably, despite legions of fans and critics, despite security failures and the occasionally unacceptable result – Microsoft builds computer software well. Application and Operating System development is one of the cornerstones of their organization's skills.

Where Microsoft has struggled is the web. Sure, they have a strong footprint and solid brands but their share of search (2.9% as mentioned) is pitiful. Their ability to draw consumer traffic is good, but weak compared to Yahoo or Google. Microsoft’s advertising services also haven’t been their strongest suit historically (but they are aggressively working to change that through acquisition and exclusive client lock-ups).

•The Yahoo Component
In the context of Cloud computing, Yahoo doesn’t at first seem a serious contender. But their stated goals are to be a start page in a connected world. That kind of positions them as a possible desktop equivalent in a Cloud environment. Moreover, Yahoo has tremendous traffic, great brands (Flickr, the rest of Yahoo), web development and engineering talent, a dominant stake in Internet display advertising, and a lot more search strength than Microsoft. Yahoo has also done pretty well at application development for an online world (both in-house and through acquisition). Their purchase of Zimbra, and its enterprise messaging platform, is a component case in point.

Taken in context, Yahoo’s strengths can be viewed as components of the Cloud paradigm where Microsoft is lacking or could use a boost.

•So is Cloud Computing an Alternate Theory of the Deal?
Is Microsoft’s head in the clouds? Is the purchase effort about an Internet operating system and the future of the Internet?

Sure it is…. But it’s a matter of timelines.

In the short term, the buy brings plenty of benefits now. Among them, Yahoo’s assets, cash and strengths contribute significantly to Microsoft’s present operations. The advertising components alone could be especially valuable in competing with Google. With the stock price beat up and the market uneasy, the timing was good for Microsoft to take its shot. All of that justifies the present offer.

In the longer term, however, it’s to the Cloud. Yahoo’s present assets could well help Microsoft battle Google in this Internet arms race. Microsoft didn’t design this deal without at least taking that into consideration. And if you take Bill Gates at his tea leaf reading, future forecasting word, the Cloud may be a much bigger part of it than that.

Source: Is Microsoft’s Head in the Cloud?