Microsoft (MSFT): A Final “No” To Yahoo! (YHOO)

It may have occurred to Microsoft (MSFT) that Yahoo! (YHOO) is so badly wounded by its own poor management that a buyout of the portal company would be more trouble than it is worth. Now that Google (GOOG) has walked away from a partnership to sell search advertising for Yahoo!, the smaller company is faced with poor revenue performance and relatively high costs.

According to Reuters, Microsoft’s CEO made it clear that he will not come up with a new offer. Steve Ballmer said "We made an offer, we made another offer … We moved on,"

The internet advertising business is turning out to be less successful than most analysts would have predicted a year ago. The recession is only part of that. Online display advertising may be no more effective than TV or magazine ads. Targeted search marketing is still popular, but Google has that business locked up.

A number of analysts say that Microsoft is under time pressure. Google’s lead in search will allow it to erode Microsoft’s lead in desktop software.  Google can use its popularity with consumers and businesses to create and sell competing PC operating system products, hitting at the core of Microsoft’s most profitable franchises.

But, Google has its own troubles now. It stock trades fairly near its 52-week low. Investors are concerned it spends too much money and gives away too many products for free.

Almost no one believes it, but Microsoft probably has two or three years to address its awful position in the search engine business.  By then, search may not even be "the next big thing" in technology. The passage of time often turns those things on their heads. Microsoft’s chances of being in a good position to remain the dominant force in software are as good or better than anyone’s. The future of operating systems may be on mobile devices or other electronics. Forecasts about the future of technology as almost always off because the chaos of  consumer and enterprise needs makes the market remarkably fluid.

There are already a number new of "side doors" opening into the PC and enterprise computing businesses–virtualization, cloud computing, server-based applications. One of these may turn out have important significance to a broad spectrum of consumers. Microsoft can afford to play at a high level in each one.

In the technology business, the long-term future is always about six months off.

Douglas A. McIntyre