Microsoft's primary interest in Yahoo is not one of technology; but of eyeballs.  With Google's business growing at a phenomenal rate Microsoft needed to act fast to stay in the race, says Richard Edwards, Butler Group information management practice director.

Microsoft's unsolicited (and somewhat generous) bid of $44.6bn last week for Yahoo has stirred-up a hornet's nest of protest from Google. The company's senior lawyer and apparent spokesperson, David Drummond, is reported to have said that Microsoft's "hostile bid" is an attack on "the underlying principles of the internet", and that the company would seek to block any deal between Microsoft and Yahoo on antitrust grounds.

There are a great many angles to this story and it is nigh-on impossible for one person to consider them all. However, by way of a collective mind-meld, the Butler Group Analyst team has the following to say on the matter.

The first thing to note is that Microsoft's primary interest in Yahoo is not one of technology; it is one of eyeballs. Yes, Yahoo does have some very "cool" technology, especially for mobile devices (Yahoo! Go). But the ferocious, all-out nature of Microsoft's bid clearly indicates that there is much more at stake here than technological prowess: the advertising dollar.

However, unlike today's corporate IT world, web consumers (and that includes you and me) are able to move their "allegiance" whenever the mood takes them, unless, that is, you have them bound to a social network of friends and family - hence Microsoft's $240m-minority stake in Facebook in November 2007. If the deal goes ahead, Microsoft might just have what it needs (Instant Messaging, social networking, gaming, user-generated content, etc.) to corral a significant proportion of the web population and to then funnel this vast community past its lucrative advertising hoardings.

Whichever way one looks at it, from a commercial perspective, the web is very much a numbers game, and so with Google's business growing at a phenomenal rate Microsoft needed to act fast to stay in the race. If I were a Microsoft shareholder (which I'm not) then I would be encouraged by the deal, as growth and profit are fast becoming inextricably linked to the dynamics of the web.

Looking at Microsoft's traditional revenue streams of Windows and Office, then one can see how the acquisition might bolster Microsoft's Office Live strategy by driving traffic toward its online services. Although rankings vary from country to country, the Yahoo web site has consistently been the number-one destination on the web according to Alexa, with MSN dipping to fifth spot as Microsoft redirects traffic to live.com.

Microsoft of course wants to preserve its dominance of the personal productivity tools arena, and so it must lure as many of us as possible to its online offerings. Google's own offerings in this space are still poor imitations of traditional PC applications, but one only has to look at projects such as Adobe's Buzzword and Premier Express to see how things could evolve over the next couple of years. Indeed, if Google were to "tighten its links" with Adobe, then we really could see something very special happen in this space.

A Microsoft - Yahoo tie-up would obviously have an impact on Google's online search and advertising business, and so Google is undoubtedly going to fight tooth-and-nail on this one. But while the general feeling amongst Butler Group analysts is that the US antitrust authorities will probably approve the acquisition, there is a strong consensus that the EU might block it.

The EU antitrust brigade appears to be far more wary than its US counterpart, especially where Microsoft and Google are concerned. For example, the US immediately approved Google's purchase of DoubleClick, but the EU has reportedly prepared a statement of objection, although it has not yet blocked the move. Also, of course, the EU has taken a very strict line with Microsoft in recent times, including the long-running Windows/Internet Explorer saga, and more recently, Windows Media Player. So, if the EU wants to find an objection to the deal, then it isn't going to be all that difficult, and any prolonged investigation could seriously scupper Microsoft's plans.

Looking at the deal from a purely financial perspective, Microsoft currently has enough cash in the bank to buy Yahoo outright, but the company has decided to fund part of the deal with debt, a first for Microsoft to the best of my knowledge. This leads me to think that further acquisitions might not be too far away, or that Microsoft does not want to blow its entire warchest on this one deal.

If the deal goes through, Microsoft will be paying a 62-per cent premium for Yahoo, and this has led some commentators to suggest that the company is digging its own grave. But with global internet advertising predicted to top $40bn this year, and $80bn within three years, this is a big-bet game for Microsoft. To put this into perspective, Microsoft's total group sales for 2007 were $51bn, compared to Google's $17bn, and Yahoo's $7bn.

The rapidly changing online landscape, which is having an increasing impact on enterprise IT, has exposed a weakness in Microsoft's business, as despite heavy investment over an extended period of time, the company has not succeeded in dominating the internet in the same way it did the personal computing arena.

Google's continued success has forced Microsoft into taking this bold step in order to maintain its position. If the company gets it right then there is the potential to compete strongly with Google. However, if the acquisition turns into a tortuous game of piggy-in-the-middle, then Microsoft could find itself in a rather perilous position, a situation that few in the IT industry will ever have contemplated.