Let me make something clear. Microsoft CEO Steven Ballmer has not asked for my advice regarding Yahoo! Or anything else for that matter. But why should that stop me?

Microsoft's bid for Yahoo! was both bold and risky. It was also expensive at nearly $50 billion, although Microsoft can afford it. The bold came from the fact that it was an unfriendly act, something new for Microsoft at least at that scale. The risk came from the challenge of integrating the Yahoo! staff into a company with a very different culture and world view.

But Ballmer thought it was a reasonable risk. More than Yahoo!’s employees, he wanted Yahoo!’s eyeballs, the people who used the site often enough to make it number two in Internet search. It is the selling of ads directed to those eyeballs that has been immensely profitable for Google. Ballmer thought he could win over some of the key staff and could afford to lose the others. He did not expect to find in Yahoo! CEO Jerry Yang a man who would enter into agreements diminishing the value of the company, just to keep it out of Microsoft’s grasp.

Now Ballmer is talking up a smaller deal with, rather than for, Yahoo! This may be a purchase of Yahoo!’s search business. Microsoft may also become an investor, taking a stake in Yahoo!’s web site. But Ballmer is also on a world tour, and he is looking for smaller companies with interesting technology which Microsoft can buy. $50 billion goes a long way.

But Ballmer might also be well served if he looks right here at home. Not at established companies, but at new talent now on the college campuses. I remember a time when freshly minted computer majors couldn’t wait to go to work at Microsoft, which was seen as up-and-coming, trend setting, and a fun place to work. That was in contrast to the industry leader at the time, IBM, which was seen as stogy, old fashioned, and boring.

Today, the bright young things coming out of college all want to work at Google. They see Microsoft as stogy, old fashioned, and a boring place to work. These are the people who will come up with the next big thing, the thing that will attract even more eyeballs.

They might even come up with a better system for searching the Internet. That is where Google is vulnerable. Unlike some markets, like operating systems where Microsoft dominates, there is no real cost to the consumer who switches from one search site to another. I used a site called AltaVista, run by Digital Equipment, when I first began to use the Internet. But it was a simple matter to give other search engines a try, and when Google came on the scene it was immediately apparent to me that it was much more likely to find what I was looking for than AltaVista or any of the other sites available.

So all Microsoft has to do to solve its eyeball problem is come up with a better search engine, or anything else that will drive people to its Internet sites. That’s certainly a tall order, but certainly not impossible. There is virtually no cost of entry.
The irony here is that Microsoft does have a huge commitment to basic research and development. It has set up research labs around the world, hired top notch researchers and permitted them to pursue a wide range of basic research. In many ways Microsoft has assumed the role once played by IBM and Bell Labs in this area. But the message has not been adequately delivered on the college campuses.

Over at Google, the young and the restless are releasing dozens of new and interesting projects under the umbrella title “Google Labs.” None have had an economic impact on any market segment. But it only takes one. Steve, I think you’ve gotta get some of that action.

Sincerely, Scott.