Can Microsoft chug along without Yahoo?

SEATTLE, USA: Now that Microsoft Corp has shelved its bid for Yahoo Inc, it must convince investors it has a viable "Plan B" to fix an online business that has racked up nine straight quarters of losses.

That may be difficult for investors with long memories.

Six months ago, Microsoft Chief Executive Steve Ballmer told a who's who of Silicon Valley that the software company was prepared to take an "independent" path in its challenge of Google Inc.

Ballmer said at the Web 2.0 summit in San Francisco that while a combination with Yahoo might make sense in the future, Microsoft believed the independent steps it was taking -- capital investment, research and development and smaller acquisitions -- would, ultimately, lead to success.

When Microsoft then offered $44.6 billion for Yahoo a few months later, and said it had been pursuing Yahoo for more than a year, many wondered whether Microsoft ever believed its "go it alone" strategy. After ending talks with Yahoo over the weekend, that strategy's viability could be tested.

"It is imperative that in relatively short order Microsoft's management articulates a viable and credible new strategy for the online services business in the absence of Yahoo," Bernstein Research analyst Charles Di Bona wrote in a note to clients on Monday.

"With the caveat that returning to the prior, pre-Yahoo plan is likely to be neither credible nor well received."

Microsoft's online unit, which accounts for five per cent of revenue, is central to the company's future. It expects online advertising generated by the business to one day rival its bread-and-butter licensing revenue.

The division will also guide Microsoft's transition in offering software that is delivered over the web as a service instead of running locally on a computer's hard drive.

On Monday, the first trading day after it yanked its $47.5 billion offer for Yahoo, Microsoft shares fell 16 cents, or 0.55 per cent, to $29.08. The stock rose three per cent in early trading before giving back those gains.

Analysts attributed the fall to a view that Microsoft was playing hardball with Yahoo and the deal was not actually dead, but others suggested the collapse of the Yahoo deal shed light on the challenges facing its online business.

Windows Live vs MSN



So far, Microsoft's rebranded Windows Live platform of web services including e-mail and online photos has left some users confused about how it fits with existing MSN properties. Its web search continues to lose market share to Google, even after a revamp.

"A future without Yahoo is a negative for Microsoft's online unit, as we have long believed that Microsoft needs to get more aggressive in order to close the gap with Google," FBR Capital Markets analyst David Hilal said in a research note.

Meanwhile, in an e-mail to employees, Ballmer argued that Microsoft can achieve its goals without Yahoo. "We have a strategy in place to do so and we will continue to expand on this strategy and accelerate our progress."

In advocating the Yahoo deal, Microsoft Chairman Bill Gates and Ballmer had said Yahoo was the best and fastest way to gain the necessary scale for its online business to compete.

In the last few years, Microsoft has worked to build and refine a web search engine of its own, creating a new search advertising system called adCenter. More recently, it bought online ad company aQuantive for $6 billion.

Those steps have yet to deliver significant progress toward its goal, building an advertising powerhouse to rival Google.

The company was prepared to spend as much as $47.5 billion on Yahoo and it may choose to use that money to go on an Internet shopping spree instead.

Time Warner Inc's AOL unit could give Microsoft a stronger position in online display advertising, while social networking sites like Facebook and MySpace, owned by News Corp, may supply a large and loyal audience.

But putting all those pieces together would require focused execution on a clear vision, something Microsoft's online business unit hasn't demonstrated in the past.

Since the start of 2006, Microsoft's web business has racked up losses totaling nearly $1.7 billion.

Meanwhile, it has spent billions of dollars on massive data centers to provide the computing and storage infrastructure for services ranging from free e-mail to hosting business management software.

"Microsoft has tried for a long time and it hasn't really gotten anywhere with its online initiatives," said Morningstar analyst Toan Tran. "If it's going to catch Google, it's got to get big, quick. Every day, Google gets stronger and stronger."