The Wall Street Journal-20080202-Microsoft as No- 3

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Microsoft as No. 3

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Word of Microsoft's $44.6 billion unsolicited bid for Yahoo was scarcely out yesterday before the Justice Department and Senate Democrats expressed their eagerness to "investigate" it. No doubt if the deal moves forward, Microsoft will be put through a wringer, with all those bad memories of Microsoft's "Netscaping" competitors and the "browser wars" brought back to the surface.

But amid the hand-wringing to come, bear in mind that Microsoft is the underdog in Internet search and advertising. Remember when Microsoft was going to leverage its dominance of the operating-system market into control of the Internet? By a quirk of fate, at almost the exact moment that Justice filed suit against Microsoft in 1998, a couple of graduate students in Silicon Valley were seeking money for a little company they wanted to start. They called it Google.

Ten years on, Google isn't so little and Microsoft is a distant No. 3 in the search market. Yahoo, the No. 2 search engine, had seen its stock fall some 80% from its dot-com-era highs before Microsoft made its bid. Remember those days? It's funny how the one true Internet giant to emerge from the bubble wasn't even publicly traded when the Nasdaq poked its nose above 5,000 in March 2000. Business fortunes are hard to predict.

And so while Microsoft was being excoriated for including a Web browser with Windows and then -- horrors! -- a media player too, Apple found a killer app in iTunes and Microsoft's fleeting monopoly on a browser that it gave away didn't turn out to be a cash cow after all. It's hard to make it up on volume when the product is free.

Yes, Microsoft still makes lots of money selling Windows and Office. But the plans for world domination have been put on hold. Yahoo might help Microsoft give Google a run for its money. Or maybe -- just maybe -- there are some kids in a garage somewhere as you read this, writing the code that will make Google shareholders look back on its $160 billion market cap in early 2008 and weep.

Last year, "social networking" became the Internet flavor of the month. Its appeal is not merely that users supply most of the content on sites like MySpace and Facebook, but that it is giving millions of people a whole new way to interact with and on the Web. Is that a revolution or a fad? Who knows? But we're willing to bet that in another 10 years all of us will be using the Internet in ways not yet invented in 2008. Microsoft's bid for Yahoo is, above all, an admission that while it was chasing the browser and media player markets, the world was moving on. That won't stop.

Meanwhile, in Washington, Google and Microsoft have been tormenting each other for years. When Google won the bidding with a $3.1 billion offer for Doubleclick last spring, Microsoft led the lobbying to derail the deal. The arguments sounded suspiciously like those Microsoft derided in the 1990s. Google can now be expected to return the favor, and it has been showering enough money around Washington to get a hearing for its scare stories about big, bad Microsoft.

Whether Yahoo shareholders like the deal or not is for them to decide, not Wisconsin Senator Herb Kohl or Justice Department attorneys.