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A reminder of why Microsoft wanted Yahoo

The megamerger plan may have gone away, but the threat from Google that the software giant was aiming to address has not.

So why did Microsoft try so hard to buy Yahoo? Simply put, Google is Microsoft's nightmare come true, and the Windows maker needed Yahoo to better compete with that growing search beast in Silicon Valley.

Henry Blodget at Silicon Alley Insiderhas posted Tuesday a good look at how Microsoft's Windows and Google's search will stack up by 2009. The results aren't necessarily surprising, but they're certainly interesting to see in print: By this time next year, Blodget predicts, Google search will pass Windows in total revenue.

Google is no longer in Steve Ballmer's rear mirror. It's right next to him. Dan Farber/CNET

Blodget makes a few other significant points: Both products are natural monopolies; both are incredibly profitable, with operating margins topping 75 percent, and Google search is growing a lot faster than Windows.

Of course, Microsoft doesn't just do Windows. The company has plenty of other, incredibly successful products, ranging from the Office suite to the Xbox 360 gaming console. But the mantra at Microsoft has always been that everything begins with Windows. When Windows has a real rival, Microsoft has real problems.

As Blodget notes, there are caveats: The unofficial Office monopoly should give Microsoft breathing room for a few more years. But even that could be threatened as Google's more-affordable Web applications improve.

This storm has been gathering for years. In 2005, we wrote a piece at about Google's longterm threat to Microsoft. The impetus was a major management shuffle at MSN, but we had fun pulling out some old Microsoft memos about now-defunct Netscape in the early days of the World Wide Web. My favorite was a note written in 1995 by Microsoft engineer Ben Slivka describing a "nightmare" scenario for his company.

"The Web...exists today as a collection of technologies that deliver some interesting solutions today, and will grow rapidly in the coming years into a full-fledged platform (underlined for emphasis in the original memo) that will rival--and even surpass--Microsoft's Windows," Slivka wrote.

Microsoft didn't pay too much attention to the warning. Ten years later, another internal memo put a name to that nightmare--Google. Now Blodget has advanced that nightmare scenario a few more steps with his analysis.

It's always stunning that big companies can see a threat to their business years before it happens, and then fail to do something about it. (But then I suppose Clayton Christiansen wrote The Innovator's Dilemma for a reason.) Digital Equipment saw client/server computing on the horizon, and laughed it off. Sun Microsystems saw the threat from servers running x86 chips and Linux software long before it became a problem, but dithered for years before doing something about it. The list goes on.

More than a few bright minds inside Microsoft saw the threat years before it became a reality. The funny part is, they're still trying to figure out what to do about it.