Armed with an unwavering determination, a highly focused research effort and a gargantuan pile of cash, Microsoft still cannot compete with Google. Notice that I didn’t say “Microsoft cannot defeat Google”, Microsoft is light years away from that and moving further away all the time. The same is true of Yahoo!, Yahoo! cannot compete with Google. It makes a far better fist of doing so than Microsoft, but it too is watching Google pull further and further away from it.

“Loser on loser” is a useful tactic in the game of bridge, but it wont work as a strategy for the web. Of course, the acquisition may not happen. Yahoo! may find a way of making Microsoft back-off, but I doubt it. If I were a Yahoo! shareholder I’d take the cash and buy shares in Google.

The Microsoft Malaise

Microsoft is far more than formidable as a competitor in businesses that it understands. It has held its grip on the desktop for far longer than I ever believed possible – and it still holds on, although Vista may be in the process of undermining that a little. (I’ll write more about that in a few days). It has established a massive footprint in the server software market and it has built a games business from scratch.

Microsoft doesn’t understand the web. It thought it did, as it used the power of the Windows monopoly to crush Netscape. But in truth, Netscape didn’t understand the web either and was stupid enough to pick a battle with Microsoft on the desktop, instead of picking a battle in the cloud. Microsoft never understood that there was a cloud and it thought it had won a great victory. And Google stepped in.

The control points (points of strategic value) for web businesses are new and different. After recurring traffic, which is the primary control point, one of the major control points is monetization. Google built a search engine (establishing traffic) and then monetized it through search advertizing and then extended its engine through its AdSense operation to any web site.

It is because Yahoo! has an advanced advertizing engine and strong advertizing presence that Microsoft wants to acquire it. True, Yahoo! also brings a vast amount of traffic from email, chat, games, and a whole lot more. It even brings a little of web 2.0 with Del-icio.us. What it doesn’t bring, though, is a coherent means of competing with Google. It simply doesn’t have comparable assets to Google, whether you think in terms of; search, infrastructure (Google’s awesome home-grown server farms), video (YouTube), Web 2.0 office services (now acquiring users at a respectable rate) and communications (currently under construction).

Microsoft will get some useful assets from Yahoo!, but at a very high price. What it will not get is an executive team, or even a single executive, that understands the web and has a growth plan that doesn’t involve butting heads with Google. It’s even possible that if the Yahoo! bid succeeds Microsoft will watch all the quality Yahoo! staff drift off down the road to Google. If I were Google I’d start the recruitment campaign now. It might even be that Microsoft is doing Google a huge favor, by hampering the effectiveness of Google’s only real competitor.

The Great Second Mover

There’s panic in Redmond. The Small Medium Business (SMB) market is gradually heading into “the cloud” and not via Microsoft Live. It will take a few years and the Microsoft Office money machine will continue to print dollars while that happens, but the writing is on the wall. The Windows client OS revenues are thoroughly tied to MS Office. They wax and wane in unison.

Take a look at the iPhone. It’s clearly the shape of mobile devices to come. Could Microsoft produce anything like that? No.

Microsoft is a second mover not a first mover. It’s never been a first mover. So tell me, where does Microsoft make a cent out of the iPhone when it’s in use? It doesn’t. And that, of course, is why Microsoft bought Danger Inc. a few days ago.

There’s a pattern in all of this. Microsoft’s fundamental corporate weakness is that it is not a good innovator and it is not a first mover. Where innovation happens in Microsoft, it happens despite rather than because of corporate culture. Acquiring Yahoo! and Danger Inc is unlikely to change that. Most likely it will stifle the innovative instincts of both companies. And anyway, those acquisitions are second mover plays.