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Yes, Microsoft is pursuing a different type of operating system, which goes by the name of Midori. And, no, it's not the next version of Windows.

The Midori subject has gotten a great deal of attention in recent days, with the fires only fanned by the fact that Microsoft has refused to say anything about Midori beyond confirming that it is an "incubation project" within the company. ZDNet's Mary Jo Foley noted its existence in her Microsoft 2.0 book, while more recently SDTimes posted a bunch of details on Midori based on internal documents.

From there, there has been plenty of speculation about what Midori is and isn't.
Microsoft's Eric Rudder

Eric Rudder, Microsoft's executive vice president for technical strategy, is heading up the Midori effort.
(Credit: Microsoft)

Here's what I've been able to confirm:

Midori is related to Singularity, a research project that dates back to 2003 and is basically a look at how one might architect an operating system from the ground up, given what we know now about computing and where things are headed in terms of parallelism and cloud computing. Longtime Microsoft engineer Eric Rudder is the one leading up the Midori effort.

Whereas Singularity was a research effort firmly confined to a small team of researchers inside Microsoft's in-house labs, Midori is an effort to see if there is something commercially viable that could come out of it, though it could be years off and come in pieces if it comes at all.

The one public mention I found to Midori was within a research paper on a bug-finding program called Chess. On one PowerPoint slide, it mentions a list of "current Chess applications" of which one bullet point is "Singularity/Midori (OS in managed code)."

That syncs with the SDTimes report, which talks about Midori as an OS for the age in which computing resources can be either local or in the Internet cloud and in which processing tasks can be split among multiple processors and multiple machines.

It's worth noting that Microsoft often has incubation projects that seek to explore whether an all-new approach to a product might be justified. That said, up to this point, every update to Office and Windows has been some type of incremental improvement, not a ground-up rewrite.

Back in 2000, the company had an effort called NetDocs that many thought might replace Office with an online productivity suite. Eight years--and at least three Office versions later--people are still wondering when we will see such a product from Redmond.

That suggests to me that the arrival of Midori or some similar approach as a Windows successor is something that is a long way off, if it ever happens.

Microsoft has struggled to change even single subsystems of the Windows operating system, such as the file system. Microsoft has had both Cairo and WinFS projects, ultimately opting instead to stick with trying to build on top of what is already there.

The fact, though, that Microsoft is thinking about new ways it might do an operating system should not come as a surprise. I'd be surprised if they weren't exploring that idea.

What will be more interesting is if Microsoft actually does release something all-new. With its much smaller and mostly consumer base, Apple has shown several times a willingness to sacrifice compatibility in order to take the Mac in a new direction--most notably the shifts from 68000 processors to PowerPC, from OS 9 to OS X and from PowerPC to Intel chips. Microsoft, though, with its huge base of business and consumer users, has long favored compatibility over new capabilities and approaches.

The question is how long this approach can continue. I (and others) have been asking for some time whether Windows hasn't gotten too difficult to update. Take Longhorn/Vista. After a few years of work, Microsoft decided the major architectural changes it was planning were too drastic. It went back to the drawing board, but even the more modest changes it made with Vista have come under attack.

I wonder if, in this day and age, it wouldn't be possible for Microsoft to emulate all of Windows, while moving forward with a more modern software approach, sort of like Apple did with the "classic" mode in OS X. I have no idea if that's anywhere in the cards or not.

But if anyone wants to share some more Midori--I'm up for another round.

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update Yahoo on Monday announced that it is rejecting Microsoft's multibillion-dollar buyout offer, saying that it undervalues the company.

The announcement had largely been expected, as reports emerged over the weekend such a decision had been made by Yahoo's board of directors.

"Yahoo's board of directors has carefully reviewed Microsoft's unsolicited proposal with Yahoo's management team, and financial and legal advisers, and has unanimously concluded that the proposal is not in the best interests of Yahoo and our stockholders," the company said in a statement Monday.

"After careful evaluation, the board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow, and earnings potential, as well as our substantial unconsolidated investments," the company further noted.

Yahoo said its board will continue to evaluate its strategic options and pursue a path to "maximize value for all stockholders."

Microsoft, which on February 1 offered a cash-and-stock deal initially valued at $44.6 billion, is likely to already have contingency plans, such as attempting to create a board of directors that would be friendlier to a Microsoft deal, said proxy solicitors.

Yahoo's annual nomination process for board elections is set to start Wednesday and run through March 14, according to a U.S. Securities and Exchange Commission filing. Each year, all 10 of Yahoo's board seats are up for grabs.
If Microsoft walked away from its offer, where do you think the stock would go?
--Kevin Landis,
chief investment officer,
Firsthand Capital Management

Microsoft may already be eyeing those seats.

"If they haven't done it already, they're in the process of assembling an appropriate slate," said Bruce Goldfarb, a veteran proxy solicitor. "It's fair to assume they will run for board seats, and it won't take them long to fill the slate. We're talking Microsoft here. They have resources and access to countless high-quality candidates to be a director."

Should Microsoft move forward in launching a proxy fight, it's difficult to say whether it will stake its flag early in the four-week window or wait closer to March 14. Timing is based on the state of negotiations, as well as the personalities who are pushing for a merger, Goldfarb said.

"By launching it early, it says, 'We're serious and ready to go. The pressure is on, and we can always pull back, but know we are there,'" Goldfarb said, adding, "Personality is always a factor in a proxy fight decision. It has a strong effect on how a decision is made."

Should Microsoft launch a hostile bid for Yahoo, one proxy solicitor said, it's likely that Yahoo will go to the Department of Justice and lodge complaints over antitrust issues related to a merged company.
Special coverage
Yang's e-mail to Yahoo staff
CEO Jerry Yang sends his troops an e-mail explaining how Microsoft's bid "substantially undervalues Yahoo."

In the current regulatory environment, Microsoft may surmise that its merger proposal will not be blocked. But Microsoft is also aware that the situation could change after national elections this fall, according to a proxy solicitor who requested anonymity.

Similar measures were taken by PeopleSoft, which nearly five years ago found itself the takeover target of a hostile bid by Oracle.

Although the Department of Justice stepped in and filed a lawsuit to block the merger, the agency was ultimately overruled by a federal judge in San Francisco. The 18-month saga eventually ended in late 2004, when PeopleSoft accepted Oracle's offer, valued at $10.3 billion.

Yahoo's institutional investors are eyeing Microsoft's offer and weighing their options. Should the software giant prevail--either through a proxy contest or tender offer--and a vote is put to Yahoo shareholders, one institutional investor said he would probably take the money.

"They're offering a lot more than the market was willing to pay before their offer. If Microsoft walked away from its offer, where do you think the stock would go?" said Kevin Landis, chief investment officer of Firsthand Capital Management, which manages more than $600 million in assets.

Firsthand's Yahoo stake amounts to more than 300,000 shares, of which half are held in its flagship Firsthand Technology Value fund.

Landis noted that should Yahoo ultimately pass on Microsoft's offer, it may take a year for the stock to rise back to the level of Microsoft's bid. And during that time, investors could have taken Microsoft's cash and reinvested it in other beaten down but promising technology stocks, Landis said.

Yahoo's shares dipped slightly to $29.55 in morning trading as Yahoo released news that it rejected Microsoft's offer. But its share price is still substantially higher than the $19.18 closing price on January 31, a day before Microsoft's buyout bid.

Since late October, Yahoo's share price has fallen off its 52-week high of $34.08 per share.

Firsthand has owned its Yahoo stake for about a year, purchased in part because of Yahoo's launch of its long-awaited Panama search-advertising platform in late 2006; its ownership stake in Chinese business-to-business site Alibaba.com, which had a tremendous IPO on the Hong Kong exchange in November; Yahoo's balance sheet; and its "reasonably" priced stock, Landis said.

Although Yahoo's stock has underperformed during that time, Firsthand has largely maintained its ownership stake in the company. But Landis said he would probably take Microsoft's money, if given a chance.

One thing that Landis, as well as other institutional investors would have to contend with if they own both Yahoo and Microsoft, is what to do with their Microsoft position.

Firsthand has owned Microsoft shares for years, although it's a smaller stake than its Yahoo holdings. Landis, as well as other similarly situated investors will have to consider whether to sell off some of their newly inherited Microsoft position, should a deal go through, or increase the percentage of Microsoft shares in their portfolio.
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"Microsoft is already pretty much where we want our position," Landis said. "There could be some selling pressure on Microsoft, but all the (arbitragers) have figured that out."

Since announcing its Yahoo bid, Microsoft's shares have fallen roughly 14 percent, to about $28 this morning.

Cambiar Investors is one Microsoft shareholder that liquidated its holdings after the Yahoo buyout bid news.

"We...liquidated on the news," said Brian Barish, Cambiar president. "Microsoft knows even less about the Internet than Yahoo. I can't see how they can make the business better.

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Seeing how I need to be in tip-top condition to view a New York Giants' upset on Sunday, I've settled on "clusterbombs."

You get the idea.

Am I being overly grumpy? Since we're going into Super Bowl weekend, I was reminded that when the Dallas Cowboys traded Herschel Walker to the Minnesota Vikings in October 1989, most football experts thought the Cowboys got the raw end of the deal. They had dealt away perhaps the best running back in the game in return for a collection of no-name role players and six future draft picks. The upshot: Dallas won three of the next eight Super Bowls while the Vikings are still on the schneid.

But software is a harder contact sport than football, and for Microsoft to pull this off, Microsoft CEO Steve Ballmer will need to throw one hell of a hail mary pass. Naturally, the big money players are rooting for him to be successful. This is a deal armchair strategists and Wall Street stock pumpers have been in love with for the last couple of years. Yahoo's been a weak stock and they'd love to make a profit on what's been a lousy investment.
This is a deal armchair strategists and Wall Street stock pumpers have been in love with for the last couple of years. Yahoo's been a weak stock and they'd love to make a profit on what's been a lousy investment.

Take a gander at the early analyst reactions pulled together by Henry Blodget over at Silicon Alley Insider:

Imran Khan at JP Morgan: "Microsoft and Yahoo will likely encounter little resistance from regulators, since their combined share of the search market would only be around 30% compared to Google's 60%. The combination would give Microsoft much needed scale, which would be invaluable in challenging Google...Further, we believe the increased scale of the combined search entity would lead to improved monetization due to a number of advertisers, which positively impact coverage, click-through rates, and pricing. Microsoft's command of access points through Windows, Xbox, and Internet Explorer would enable it channel yet more search. This is a crucial synergy."

Citi's Mark Mahaney: "For Microsoft or any other company seeking to gain scale in Internet advertising, Yahoo is an obvious strategic choice given its position as one of the top 3 Web properties worldwide." Citi cautioned against over-enthusiasm, noting that while the prospective merger would "pose a greater competitive risk to Google. But near-term, we'd be skeptical that search users' overwhelming preference for Google would change."

Sandeep Aggarwal, Oppenheimer: "We believe that in the long run both Microsoft and Yahoo as a combined company might emerge as a stronger competitor for Google, but lots of developments would have to take place before that happens.

• Google owns nearly 75% of the search market and Microsoft and Yahoo together own nearly 18% of search marketing.

• Display advertising is the second largest online ad format at 33% of total worldwide online advertising. Google currently owns less than 2% of the display market (with DoubleClick this would increase) and Microsoft and Yahoo together own nearly 30% of display market.

• With this move, the likelihood of the EU rejecting Google's acquisition of DoubleClick goes down.

• Regarding VCLK, as the largest independent ad network, we view them as a beneficiary of industry consolidation and a leading takeout target."

And on paper, at least, you could make a plausible argument on behalf of doing a deal. Ballmer gave voice to the bigger-is-better crowd, contending on the conference call earlier Friday that the combination will translate into increased scale and capacity (at least from a consumer perspective).

In other words, 1 plus 1 equals 2 (and whatever extra can be squeezed out). That equation may add up in the field of standard mathematics, but this is the real world. The deal makers at Microsoft say they know what they're doing but they're competing against history. Even if a reconstituted "MicroYahoo" doesn't wind up in the Bonehead Hall of Fame along such stinkers as Excite@Home, Yahoo-Broadcast.com (which saddled us with Mark Cuban forever!), Compaq-DEC, and, of course, AOL-Time Warner, this will be a huge headache.
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Yahoo had its day in the sun. That's over. These days Yahoo is a severely dysfunctional, overstuffed company riddled by an indecisive bureaucracy.

Jerry Yang, who last year returned to take the helm after Terry Semel got sent into a platinum retirement, doesn't have a clue how to dig the company out of its hole. If he wasn't the guy to run Yahoo when Tim Koogle was CEO, why is Yang the guy to be No. 1 now? Since taking over, he's mumbled his way into a bigger disappointment that I ever expected. From a Yahoo perspective, the best thing now would be to take the lifeline tossed its way from Microsoft and let Ballmer handle the mess that awaits.

So if Microsoft ends up with the prize, save the early celebrations. The uneven track record of big technology deals over the last decade or so suggests that this will tax the company's managerial talents more than at any point in Microsoft's history. Don't forget that the impetus behind the buyout bid stems from Microsoft's woeful inability to compete against Google. Is Steve Ballmer really that much smarter than Steve Case?

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update Microsoft went public Friday with a $44.6 billion cash-and-stock bid to acquire Yahoo.

In its response, Yahoo called the Microsoft bid "unsolicited" but did not reject it.

Microsoft's offer, which was contained in the letter to Yahoo's board, amounts to $31 a share and represents a 62 percent premium over Yahoo's closing price on Thursday. Microsoft said it will offer shareholders the option of cash or stock.

"We have great respect for Yahoo, and together, we can offer an increasingly exciting set of solutions for consumers, publishers, and advertisers while becoming better positioned to compete in the online-services market," Microsoft CEO Steve Ballmer said in a statement.
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Yahoo said in a responding statement that its board "will evaluate this proposal carefully and promptly, in the context of Yahoo's strategic plans, and pursue the best course of action to maximize long-term value for shareholders."

The deal comes as Microsoft and Yahoo have both struggled to compete against Google.

Microsoft didn't mention Google by name in its announcement, but it did indicate that its acquisition bid was aimed squarely at its rival.

"Today, the market is increasingly dominated by one player, who is consolidating its dominance through acquisition," Microsoft said. "Together, Microsoft and Yahoo can offer a credible alternative."

In a conference call Friday morning, Ballmer said that Microsoft and Yahoo "really do share a vision for the potential of online services."

Microsoft said in its statement that it believes that it can get all of the needed regulatory approvals and that the deal, if ultimately approved by Yahoo shareholders, could be completed in the second half of the year.

Michael Gartenberg, an analyst at Jupiter Research, said it's "clear that there is increased pressure on Microsoft from Google, and they recognize that. Way back when, Yahoo wasn't that interested in a Microsoft deal. What a difference two years make. Microsoft has a pile of money, and Yahoo has experienced problems of its own. Ballmer, in the past, has historically not loved these types of deals. It is indicative of how different the world is now."

Gartenberg added that the deal "absolutely" makes sense. "But there is a lot to be done in the details. Getting this deal done might be the easiest part. The real challenge is what happens when they finish the deal. This is not a panacea--the details will be what matters," he said.

Rumors that Microsoft was interested in Yahoo have bubbled up from time to time, including the past two springs, on the eve of Microsoft advertising conferences.

The move would be by far the largest acquisition ever for Microsoft. Its largest prior deal, also in the online-advertising space, was last year's $6 billion deal to acquire Aquantive.

Asked on the conference call why Microsoft still needs Yahoo after buying Aquantive, Ballmer pointed to Yahoo's reach with consumers.

"Certainly from a consumer perspective, there's no better way to increase scale and capacity than this acquisition," Ballmer said.

Microsoft also pointed to the intense investments needed in data centers and technology needed to compete with Google.

"Scale matters," said Kevin Johnson, president of the Microsoft division that houses Windows and online advertising. "Some of the scale economics can kick in rather rapidly."

Ultimately, Ballmer said, the deal should help Microsoft become profitable in online advertising.

"We've been losing money," Ballmer said. "Our plan would be to not lose money in the future."

In a letter sent to Yahoo's board late Thursday, Microsoft confirmed that it has had talks with Yahoo since 2006 but that its suggestions of an acquisition had been rebuffed.

"In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together," Microsoft said. "These discussions were based on a vision that the online businesses of Microsoft and Yahoo should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected."

The letter goes on to say that an offer in February 2007 was also rejected. Although at one time, Microsoft was open to other kinds of partnerships with Yahoo, the company says now it just wants to own Yahoo outright.

"While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo that we are proposing," Microsoft said in the letter.

In the conference call, Ballmer said that when Microsoft first talked to Yahoo more than a year ago, it believed that a merger would have benefits to both companies.

"We believe now in those benefits more than ever," Ballmer said.

The public offer follows Yahoo's disappointing earnings report on Tuesday, which sent the company's shares down. Yahoo CEO Jerry Yang said Tuesday that the company is facing "headwinds." He also announced 1,000 layoffs.

Terry Semel, Yahoo's former CEO, who left that position last summer but remained as nonexecutive chairman of the board, left the company altogether on Thursday.

Microsoft's move validates Yahoo's value and could bring out other prospective buyers, said Danny Sullivan, editor of Search Engine Land. However, Microsoft doesn't have enough of a plan as to how it would integrate Yahoo into the company, he said.

Unlike with Microsoft's Aquantive and Tellme acquisitions, Microsoft and its Live brands have a lot of overlap with Yahoo, including e-mail, portal, advertising, and search.

"Microsoft suffers in that they are conflicted over two different brands, and now they're going to have to be conflicted over three," Sullivan said. "If Microsoft wants to be a leader in search, this is a way for them to climb up and be No. 2 against Google. And it validates that Yahoo isn't a loser. It's a company that's worth a lot of money."
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A merger might give Google some extra competition, but it wouldn't unseat it as the top search provider, and it would take some time to convince advertisers that they would do better on a Microsoft-Yahoo platform over Google's highly successful ad business, said Mark Mahaney of Citigroup.

"If Yahoo wants to remain independent, it will need to show investors that it is willing to take radical, value-creating steps," and outsourcing search to Google is one of its few options, Mahaney wrote in a research note.

Imran Khan of J.P. Morgan Securities thinks that regulators will approve the deal.

"Yahoo is better off inside a larger company with (a) strong balance sheet and technology," Khan wrote in a research note. A merger of Microsoft and Yahoo could give them the scale, in terms of search traffic, that they need to compete against Google and provide a boost on the ad side, he added.

"A combination of Yahoo's relationships (with DSL providers), and Microsoft's applications and devices, could create a very well positioned potential competitor," Khan wrote.

Microsoft's financial advisers are Morgan Stanley and The Blackstone Group.

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