Software giant Microsoft (MSFT) purchased pricing optimization software firm Rapt to help make up ground against industry leader Google. Rapt got its start trying to optimize prices for computer makers such as Sun and HP. Rapt had some good success stories and some interesting technology, although much of the benefit came from the companies getting their pricing act together, spurred in part by the technology investment. Rapt refocused on the media market, landing clients like MTV, Yahoo!, Fox, and critically, Microsoft’s own MSN.

Meanwhile, Google grew from nothing to become one of the most powerful companies on the planet because they dominate the online ad business, which is growing much faster than the overall economy. The market has rewarded this success with a P/E ratio twice Microsoft’s. (Google’s market cap is still only half Microsoft’s.)

Microsoft has been trying to extend its dominance of desktop computing to the internet since 1995. That’s when they started MSN (Microsoft Network), originally conceived as an interactive TV extravaganza. (I was at Microsoft at the time– they had a very snazzy news desk set up, and the MSN team was working long hours even by Microsoft standards.) MSN was going to support commerce like a giant online mall. And Microsoft would charge everyone rent.

But there was a problem. Netscape had created a browser that was the primary way people accessed the internet. Microsoft was worried that Netscape would use this power to control the internet. Afterall, most people left the default home page on Netscape Navigator pointing to netscape.com. (Netscape’s failure to capitialize on this is yet another of their Big Missed Opportunities.) Netscape had a vision of computing happening inside the browser, not on the desktop. Netscape technology honcho Marc Andreeson famously proclaimed that Netscape would “reduce Windows to a poorly debugged set of device drivers.” In other words, he was aiming a stake at the heart of the most lucrative product line in the history of business.

Microsoft was planning to use Windows 95 to get people online to MSN. But Netscape was suddenly the biggest enemy in Redmond. Microsoft crippled MSN and made AOL the default online service for Windows 95. In return, AOL made Microsoft Internet Explorer 1.0 the default browser for AOL. (Netscape had the inside track on partnership talks with AOL, but in another Big Missed Opportunity, managed to turn the deal over to Microsoft.) This move protected the Windows monopoly and earned Microsoft billions of dollars.

It wasn’t until the rise of Google that someone managed to earn billions of dollars in online services. Google has also started offering online applications that may someday put a serious dent in Microsoft’s other lucrative business– Office. Microsoft is now in danger of not simply losing control of the internet, but seeing the company with the most control over the internet move in on their home turf. This is what motivated the $44B hostile bid for Yahoo!. (See the San Jose Mercury News article on How Yahoo! Lost Its Way for the Yahoo! side of the story.)

Microsoft is behind in the online ad world. Even combined with Yahoo!, they’re still behind Google. Enter Rapt. Rapt provides tools to help advertising-driven businesses optimize the pricing of their ad space. This means that the company that sells the ads can charge more. They can increase profit despite having less market share. In addition, Rapt’s tools provide a more sophisticated way for large clients to manage their ads compared to Google’s simple tools which are targeted at small businesses.

Terms of the deal were not disclosed, but this will likely provide better ROI for Microsoft shareholders than the $44B they are trying to shell out for Yahoo!

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