Yahoo Deal Is Big, But Is It The Next Big Thing?

SAN FRANCISCO — In moving to buy Yahoo, Microsoft may be firing the final shot of yesterday’s war.

DealBooks full coverage of Microsofts unsolicited $44.6 billion offer for Yahoo, what it means and how it might play out. Go to DealBook »

That one was over Internet search advertising, a booming category in which both Microsoft and Yahoo were humble and distant also-rans behind Google.

Microsoft may see Yahoo as its last best chance to catch up. But for all its size and ambition, the bid has not been greeted with enthusiasm. That may be because Silicon Valley favors bottom-up innovation instead of growth by acquisition. The region’s investment money and brain power are tuned to start-ups that can anticipate the next big thing rather than chase the last one.

And what will touch off the next battle? Maybe it will be a low-power microprocessor, code-named Silverthorne, that Intel plans to announce Monday. It is designed for a new wave of hand-held wireless devices that Silicon Valley hopes will touch off the next wave of software innovation.

Or maybe it will be something else entirely.

No one really knows, of course, but gambling on the future is the essence of Silicon Valley. Everyone chases the next big thing, knowing it could very well be the wrong thing. And those who guess wrong risk their survival.

That is why, in this silicon-centric economy, front-runners do not stay front-runners for long.

Many big names of the 1980s — Commodore, Tandem, Digital Equipment and MicroPro — are in a graveyard shared by the highfliers of the 1990s — the At Home Network, Netscape and Infoseek, to name a few.

Now Yahoo, founded by Stanford graduate students who became media darlings and instant billionaires after an exhilarating initial public offering of stock, may be the next to disappear.

And Yahoo, which is based in Sunnyvale, Calif., is only 13 years old. Microsoft wants to buy the company for $44.6 billion as its way to compete with Google, the hot company of this decade, which was also founded by Stanford graduate students who became media darlings and instant billionaires after an exhilarating initial public offering.

“This is the very nature of the Valley,” said Jim Breyerof the venture capital firm Accel Partners. “After very strong growth, businesses by definition start to slow as competition increases and young creative start-ups begin to attack the incumbents.”

The economist Joseph Alois Schumpeter had a name for this principle of capitalism: creative destruction. Perhaps nowhere does it play out more dramatically — and more rapidly — than in Silicon Valley, where innovation unleashes a force that creates and destroys, over and over.

Microsoft, at the still-young age of 32, is making its largest acquisition because it, too, is affected by this force. Founded in 1975, Microsoft has had a longer run than most tech companies largely because it became very good at chasing the next big thing: an operating system, point-and-click computing, software for servers, Web services, video games, and, most recently, Internet search and online advertising.

Technological innovation may not have always been what gave Microsoft the edge. It has been frequently criticized for me-tooism and for getting it right the third time. Sometimes, marketing skill and bullying seemed also to be keys to its success. (To be fair, the creative use of those skills can also be regarded as a form of innovation.)

Microsoft won huge business battles, starting with its domination of personal-computer software against Apple during the 1980s. A decade later, it made quick work of Netscape Communications, which popularized Web browsing in the mid-1990s.

While Microsoft remains very profitable because of its lock on desktop software, its efforts to dislodge the Valley’s leading third-generation Internet company, Google, have so far failed.

Google’s central innovation, Internet search, has confounded Microsoft, despite investing billions in both technology development and numerous smaller acquisitions. Internet technology has overtaken the PC desktop as the center of the action, as people increasingly view the computer as merely a doorway to their virtual world. Google calls this phenomenon “cloud computing.”

Google, based in Mountain View, Calif., has been setting up giant data centers around the globe. It benefited from the software innovations of hundreds of nimble garage start-ups to develop programs that reach millions of users over the Web.

It has unleashed the power of free — not a new idea for the Valley — to endear itself to a new generation of computer users with services they find they cannot live without, like e-mail, digital video and social networking.

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