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Ballmer: Microsoft's Web Strategy Doesn't Stop With Yahoo

Microsoft will continue to improve search relevance, build out its own advertising platform, invest in engineering for the Web, and pursue partnerships around the world.

Microsoft may be walking away from its $40 billion-plus bid to acquire Yahoo, but there's little question that the company remains intent to invest and invent and maintain its role as a powerhouse in the tech services era. How it will do so is another question entirely.

"Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo," Microsoft CEO Steve Ballmer wrote in an e-mail to Microsoft employees on Saturday. "Ultimately, our goal is to build the industry-leading business in search, online advertising, media, and social networking. We are absolutely committed to being the leader in each of these areas."

Microsoft, he wrote, would continue to improve search relevance, build out its own advertising platform, invest in engineering for the Web, and pursue partnerships around the world. Details of what exactly this strategy will entail are far from clear, but there's plenty of money to go around and Microsoft has already embarked on a long, ambitious journey into the services era with significant research and development and investment in data centers worldwide.

"Without a quick fix, [Microsoft CEO Steve] Ballmer now has to truly lead the company through a painful and arduous period of reform -- he can't just write a check and get the company back in the game," Forrester CEO George Colony wrote in a blog post on Sunday.

For one thing, the company will need to continue plugging away with the technology it has already acquired. It's made significant investments in advertising and search since the beginning of last year, buying companies like aQuantive, Fast, and TellMe. The products and technologies purchased in those acquisitions are just now beginning to become deeply integrated into Microsoft's product lines and culture and could deliver benefits on a larger scale soon.

Microsoft's online strategy is also beginning to play out in new ways under the leadership of chief software architect Ray Ozzie, whose teams have been working in the shadows for the last two years. Among the first fruits of that labor will be Live Mesh, a synchronization and application platform that Microsoft says will bridge the PC world, where Microsoft's long dominated, with the Web, where Microsoft's lagged, and the mobile and consumer technology market, where a battle for supremacy is just under way. However, Live Mesh, like much of Microsoft's "software plus services" strategy, remains hazy.

Some of the answer might yet come from another as-yet relatively untested technology -- Silverlight. In some ways Microsoft's answer to Adobe Flash, the Silverlight browser plug-in is part of an aspiration to become a force in multimedia and in the expanding field of rich Internet applications. A new version due out later this year could provide the technology's real coming out party as new partners like NBC emerge to support the technology in high-volume Web sites. As it spreads more widely, Silverlight could eventually provide Microsoft with significant embedded advertising opportunities.

Investments in search, one of the primary jumping off points for consumers using the Web, could also pay off. Microsoft has put significant effort in the last 18 months into re-vamping its search engine to increase the relevance of its results and the site's ease of use while also accelerating development of new search technologies like mobile search and investing in search companies.

Though Microsoft's share of the search market has remained stagnant throughout that period, continued investment could provide breakthroughs, and Microsoft senior VP Satya Nadella, who's in charge of the company's search strategy, has expressed confidence that consumers are willing to switch their preferred search engines.

That said, Microsoft went after Yahoo for a reason: Buying market share can be easier than creating it organically. Live Search, for example, has a significant branding problem, and more people search through MSN then Live Search itself.

With that $40 billion-plus unspent, Microsoft could cobble together an army of smaller competitors and startups and aggregate the technology and audience it needs to be a force in search, advertising, social networking, and emerging Web technologies like cloud computing as well as Web applications.

It could begin to gain strength internationally, where companies like Baidu in China, NHN in South Korea, and Yandex in Russia have significant share of Web content, search, and advertising. This would provide a bulwark against Google in markets where the search and advertising company is not quite so dominant as it is in the United States and Europe.

Even if the real aim of the Yahoo acquisition was to buy its way into competition with Google for the search ad market, there are other markets to consider. There's another booming market -- display advertising networks -- that led to a rash of acquisitions last year, and it's largely anyone's game. For example, in a note to investors this morning, Susquehanna Financial Group suggested that Microsoft may look to acquire AOL to gain power in the fragmented online display advertising market and play hardball with Yahoo.

Microsoft currently has 8% of the share of that market, and AOL could double that, almost reaching the 19% it would have achieved with Yahoo, which is the current market leader. AOL's made headway there by placing advertising on its own sites and in the acquisition of, while Microsoft has done the same and also bolstered its position by buying aQuantive last year and signing significant advertising deals with companies like Facebook, which it also bought a stake in.

All that said, it's still possible Microsoft ends up buying Yahoo anyway. Notes from several analysts this morning, including Avian Securities' Matt Bryson and Jefferies & Co.'s Youssef Squali, suggest or imply that Microsoft might be using the withdrawal of its bid as a future bargaining chip, much as Oracle let its bid expire and waited after BEA declined its offer only to snap it up at a slightly higher price three months later.

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