One could read the forecast for Microsoft's earnings report, due Thursday afternoon, like a weather forecast: lots of bluster and gusty winds, with a strong chance of rain—falling, that is, on Yahoo's parade.
Yahoo had its say Tuesday, and as encouraging as its numbers are, they won't silence Microsoft. The software giant could improve the chances of succeeding with its $44.5 billion hostile bid for Yahoo by showing strength across its business units overseen by solid management.
And that's probably what Microsoft is going to deliver—except in one area: online advertising, arguably the key to its future if, as some predict, software eventually becomes a free commodity. That's why Microsoft wants Yahoo so badly.
Microsoft's online-services group—which includes MSN and Live Search ads—grew 7 percent in its last fiscal year, below the 10 percent revenue growth overall.
For now, however, Microsoft can still manage to do well overall while lagging online: Online advertising accounts for only about 5 percent of the company's revenue.
The other 95 percent—the Vista operating system, the Office suite of applications, and a growing business in enterprise software—is doing quite well. Microsoft is still much more dependent on personal computer sales than on online ads, and PC sales were surprisingly strong in the first quarter.
Last week, two tech research firms, Gartner and IDC, said PC sales around the world were robust. Gartner said that they grew 12 percent, to 71 million units, while IDC said that they grew 15 percent, to 70 million. Both indicate that Microsoft, whose software is packed inside most of those computers, made out pretty well.
Like Google, Microsoft is positioned to weather a domestic recession. William Blair analyst Laura Lederman points out that about 60 percent of Microsoft's revenues come from abroad—more than the 51 percent buoying Google.
What's more, Microsoft's stock has consistently outperformed the market during previous downturns.
It is putting that record at risk with its $44.5 billion Yahoo offer, which has hobbled Microsoft shares since it was announced nearly three months ago.
Brad Reback of Oppenheimer said Microsoft executives told him recently that they're pressing ahead on Yahoo because they see a bigger opportunity in online ads than others do.
"The company arrives at this projection by looking at the total global ad market, which is about $650 billion today, heading to $1 trillion," Reback wrote in a report to his clients. "Microsoft believes that online advertising will follow the same path to maturity as radio and television did, [garnering] 40 percent of total advertising spending, implying a multi-hundred-billion-dollar opportunity."
Microsoft's online-services group will make $3 billion this year. If its math is right, then snagging Yahoo would give it roughly one-third of a market worth hundreds of billions of dollars. In contrast, a $44.5 billion price tag on Yahoo would look cheap.
That's why Microsoft won't back away from Yahoo. And it's why the company will do its best to rain on Yahoo's parade with great bluster later today.
