Yahoo and Microsoft: Deja Vu All Over Again

Once again, Microsoft (NASDAQ: msft) CEO Steve Ballmer opens his mouth about the potential and/or desire for a deal with Yahoo (NASDAQ: yhoo), and once again, it's good for a 5 percent pop in Yahoo shares. He has done this before (remember that speech in Australia last year?) with much the same result, and while you gotta wonder why he keeps juicing the shares of the company he wants by publicly calling for a deal, there's an even bigger issue at hand.

Since Carol Bartz has taken over as Yahoo's CEO, there has been absolutely no meaningful, substantive discussion with Microsoft. And even though Microsoft execs have been scurrying behind the scenes to reignite deal negotiations, they've either been "rebuffed" or "ignored," according to the execs I'm talking to this morning. And, they tell me, they're stunned that once again, it seems that Yahoo isn't interested in a partnership on Search that could create a stronger competitor to Google.

Google (NASDAQ: goog) has to be watching all of this with a smirk and a grin. It's not clear that a Yahoo/Microsoft Search partnership could offer more, real competition, but just about every analyst I'm talking to -- not to mention these executives at Microsoft -- seem to agree that a partnership stands a better chance at chipping away at Google's dominance than smaller, independent companies (as measured by Search marketshare) going it alone.

The fact is, Google continues to tighten the noose around Search advertising and Ballmer himself stepped up this morning to declare that Microsoft faces "incredible" challenges in the Search business.

All of this is stunning on a number of levels: on the one hand, it's amazing that Yahoo doesn't see the financial and competitive wisdom of a Search partnership with Microsoft. But with shareholders apparently accepting their lot in life that Yahoo isn't going anywhere any time soon, and apparently unwilling to put any pressure on the company's board to do something, maybe it just doesn't matter. Maybe investors are happy to sit back and see what Bartz will do, and satisfied that shares can't get much lower, so why bother doing anything at all. Seems odd to me, but after the wringer Yahoo shareholders and employees went through last year, maybe they're suffering from an economic version of post traumatic stress syndrome, paralyzed into inaction.

But for Microsoft, the news may be even more dire. The company has been pining for Yahoo for over a year, with nothing to show for it. Ballmer has been trying to get a Search strategy together for the better part of a decade, and has nothing to show for it. The company's online business unit continues to bleed red ink every quarter, and Microsoft's marketshare in Search advertising has gone nowhere. So the stunning part about all this is that after a year of trying to get something going with Yahoo, and a decade of nothing-but-losses in its online business, Microsoft apparently has no other way to take on Google.

That'd be fine if Microsoft itself hadn't already attached the enormous importance of a vibrant online business. That'd be fine if the world weren't moving to an online model. Fine if cloud computing weren't the future. Fine if the advertising world, and its billions in revenue weren't a rich money-vein to tap in the decades to come. But online-everything is indeed the future. And Google is now positioned to become the Microsoft of a new generation, even at Microsoft's expense.

Heck, Ballmer choked out the words this morning that even Apple gained a full percentage of marketshare in the PC business.

But it's the lack of a strategic solution to the online business that gets me. So far down this road, and nothing to offer except "We have to do a deal with Yahoo" even though Yahoo doesn't want one, and even though there's no guarantee that it would be effective against the Google juggernaut. Microsoft executives might be "frustrated." Frankly, I'm stunned that Microsoft can't seem to come up with an alternative.

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