In the fall of 2005, Ray Ozzie, the Massachusetts technology whiz hired by Microsoft Corp., prodded his new colleagues to "respond quickly and decisively" to the rise of Internet software and services being used by rivals like Google Inc. to sell advertising.
"If we fail to do so, our business as we know it is at risk," Ozzie warned in a 5,000-word e-mail circulated at Microsoft.
The company rolled out its "Live" services push on Nov. 1 of that year, serving notice that it planned to compete with Google and others on the Internet, even as it continued to milk its traditional cash cows of Windows and Office computer software.
More than two years later, the Redmond, Wash., software behemoth, which dominated technology in the 1990s, is still lagging in its effort to move from the desktop to the Internet. Now, Microsoft is pressing a $44.6 billion hostile takeover of Yahoo Inc. in a bid to boost its business in Internet search and advertising.
"By combining Microsoft and Yahoo, we'll be able to build a more credible player in search and advertising," said Yusef Mehdi, the Microsoft senior vice president for strategic partnerships. "Neither one of us had sufficient scale on its own."
Microsoft's branded Live services, the vanguard of Ozzie's assault on the Internet, were always about more than search.
Windows Live offered products, including mail and instant messaging, that would better integrate its ubiquitous operating system with the Web.
Office Live gives small and mid-size companies a simpler version of Microsoft's business software, just as Google was introducing its own workplace applications. And, Microsoft even extended the Live moniker to the online gaming offered on its Xbox console.
But search has emerged as the biggest prize on the Internet, and the vehicle to generate the kind of advertising Microsoft hopes will support its software, games, and online forays into new platforms like cellphones and television. And despite Microsoft's Live initiative, and its earlier MSN portal, which still offers consumer Internet services, Google continues to dominate the $40 billion annual market for online ads, which Microsoft projects will double by the end of the decade.
"Ozzie succeeded in getting Microsoft off the dime, but it could have been much more aggressive in pursuing Internet ventures," said Dwight Davis, senior analyst with the Ovum research firm in Kirkland, Wash. Davis said Microsoft may have held itself back by fashioning its Live services as extensions of its Windows and Office franchises in an effort to protect its legacy businesses.
With its surprise offer for Yahoo, the number two player in search, Microsoft is effectively acknowledging that its own Internet strategy hasn't been enough to gain a significant foothold in advertising. Yahoo executives are mulling the offer but considering alternatives, including a collaboration with Google in the advertising arena.
While a Yahoo alliance with either Microsoft or Google could bring scrutiny from antitrust regulators, Microsoft officials are betting a merger between the second- and third-largest players in the search field would be more acceptable than a deal between the two biggest, because it could make the business more competitive.
Microsoft had a 9.8 percent share of search queries last month, compared to 58.4 percent for Google and 22.9 percent for Yahoo, according to the market research firm comScore Inc.
"If you try to grow organically in a fast-paced industry, you'll never catch up," said Laura DiDio, research fellow at the Yankee Group in Boston. "The biggest risk for Microsoft at this point is not taking a risk. There's no way that Microsoft is going to make a dent in Google on its own. When the going gets tough, the tough go shopping."
Ozzie, known as the father of the Lotus Notes e-mail and calendar program, which was sold to IBM Corp. in the 1990s, is no stranger to technology mergers and acquisitions.
He joined Microsoft when it acquired another company he started, Groove Networks in Beverly, in 2005. The following summer he replaced Microsoft cofounder Bill Gates as the company's chief software architect, leading its push into Internet applications and services. Microsoft officials said he's playing a key role in the bid for Yahoo, especially in the planning to integrate the two companies' technologies, though he wasn't available to talk about it.
Mehdi said Microsoft believes it can save hundreds of millions of dollars in annual costs by consolidating the two search engines and the server networks that support them, creating a single platform that would give advertisers greater reach.
From the standpoint of consumers, Mehdi said, it's too early to say how the search engine will be branded or what the "front-end user experience" will be.
Whatever it is, Mehdi insisted it will build on the company's Live service offerings launched by Ozzie at the end of 2005. "We're off to a very good start with our Live services initiative," Mehdi said. "And there's nothing but opportunities as we go forward to enhance that initiative. Yahoo will play an incredibly important role in that."
Yankee Group's DiDio said a merger could prove to be a good long-term investment for Microsoft as the online advertising pie expands. But first the company will have to meld the Microsoft and Yahoo offerings in search, personal finance, shopping, entertainment, and other services in a way that's appealing to consumers.
"I expect Ray Ozzie has a blueprint somewhere," she said.
Robert Weisman can be reached at weisman@globe.com.
