Will Microsoft save Silicon Valley from Google?

February 1, 2008, 10:43 PM UTC

By Michael V. Copeland and Yi-Wyn Yen

SUNNYVALE, Calif. — There was talk of monopoly in Silicon Valley Friday morning as news of Microsoft’s $45 billion offer for Yahoo spread at Internet speed via e-mail, instant message and mobile phone. But the huge irony is Microsoft’s bid for Yahoo is seen by many here as just what is needed to fend off another monopolist in the making: Google.

“We would prefer to see a healthy Microsoft and Yahoo,” says Geoff Yang, a venture capitalist with Redpoint Ventures and an early investor in Internet-based companies. “But I am starting to get worried about Google’s dominance, and in the absence of three healthy companies, I’ll take two. Competition is good for us, the industry and customers.”

A decade ago, that wouldn’t have been the case as most people in Silicon Valley viewed Bill Gates’ gang as barbarians, taking on, and in most cases crushing, cherished iconic Valley companies like Netscape. No one wants to call it out loud and proud, but the role of aggressor formerly assigned to Microsoft has been taken over by Google’s in the estimation of many of the Valley’s technologists and investors. In the case of Yahoo, Microsoft is more white knight than Visigoth.

By themselves, Yang and others are quick to point out, neither Microsoft nor Yahoo have demonstrated an ability to stop the Google onslaught, but combined they might have the heft to pull it off.

“Putting MSN (Microsoft’s Internet portal) and Yahoo together ought to provide some more scale and more efficiencies so that there is some reasonable competition,” says David Hornik, a venture capitalist with August Capital and another experienced Internet investor. “We could get more of a real marketplace than we have today.”

The hopeful note was also sounded by a number of former Yahoo employees. One of the original Internet companies, Yahoo still boasts the most traffic of any site online, streaming through its portal and various properties. And with additions like Flickr, Zimbra and other Web 2.0 startups, it has kept a strong hand on the content side.

“Yahoo will never catch up with Google in search,” says Paul O’Brien, a six year veteran of Yahoo and the head of marketing at local events search startup Zvents. “They can continue to be a portal, but there is not much room for growth there. But Yahoo is still a sexy company. Combining with Microsoft puts their properties in front of everyone who has a computer. If I were still at Yahoo I would think this is good news, it’s a new opportunity and new blood.”

But feelings were decidedly mixed Friday morning at Yahoo’s Silicon Valley campus in Sunnyvale, Calif. Four hours after the news hit, about a dozen Yahooligans were having coffee and omelettes in the company’s cafeteria and discussing whether Yahoo would accept Microsoft’s bid. Those approached by a Fortune reporter spoke on condition of anonymity.

“This is all anyone’s talking about this morning. But I can’t comment,” said one Yahoo employee, pointing to a glass wall where a group of managers sat. “They’re watching.”

The Microsoft offer follows Tuesday’s announcement that Yahoo would lay off 1,000 workers by mid-February.

Now this. Just how many jobs Microsoft might shed after acquiring Yahoo is a big unknown. Though employees said there had been rumors for some time about a possible Microsoft bid, the timing came as a shock. “I knew the stock price put us in prime selling territory, but I just felt like someone pulled the rug under me,” one Yahooer said.

Some couldn’t be happier as Microsoft’s announcement drove Yahoo’s stock up nearly 50 percent by mid-day. “This is great news, great news,” said one employee who works in accounting. “I’m not worried about my position or finding a job elsewhere, so I’m pretty excited about the stock going up.”

“I’m freaked out,” said another employee who joined the company less than a year ago in a junior marketing position. “I thought it would be cool to work for Microsoft at first, but then I read the letter and it sounded hostile. I’m already worried about the layoffs, and this doesn’t help.”

One worker sighed as she reached for copies of the San Jose Mercury News and the Wall Street Journal. “Just seeing if we’re in the news,” she said. “Ugh.” Behind her, about a half dozen colleagues were at the company’s gym running on treadmills with their eyes glued on CNBC’s updates.

Steve Mitgang, CEO of online video site Veoh, and a former senior vice president at Yahoo in charge of ad products and the creation of the company’s online ad system Panama, is bullish on the combination. “Online advertising is all about being able to understand users in the right context, what they do during their day and their lives,” Mitgang says. “Search is a part of that, but it’s not everything, Google doesn’t have it all. Combining Microsoft and Yahoo gives them the greatest context in the world about what users are interested in. It could be extraordinarily powerful.”

But the big fear among some in the Valley is that Microsoft somehow crushes the thing it most needs in Yahoo, Internet expertise. The smart move, say Valley insiders, is for Microsoft to admit they have failed at the Internet game and let Yahoo become their online presence. “If I were Microsoft I would look to Yahoo to be the lead in figuring out the digital future,” says Hornik. “Not the other way around.”