Ballmer done with Yahoo? Don’t bet on it.

So Steve Ballmer says he’s given up trying to buy Yahoo. If that were true, than it would be good news. Merc reporter Elise Ackerman wrote the following last Friday:

Ballmer said Microsoft’s strategy is to win through innovation, reinvention and investment in “semantic expertise,” referring to Microsoft’s recent acquisition of Powerset, a San Francisco search company with technology for helping machines better understand the meaning of Web pages and human queries.

The question is whether he really believes that. After all, hasn’t Microsoft been trying to do that on the Internet for more than a decade? And where has it gotten them? Answer: Total disarray.

 The latest sign of that came last week when Microsoft’s online chieftain Kevin Johnson decamped for Silicon Valley to run Juniper Networks. Merc scribes Brandon Bailey and Pete Carey wrote:

Analysts said the move shows that Johnson – or his notoriously demanding boss – had become frustrated with Microsoft’s failure to build an online business capable of challenging Internet giant Google by buying established Web companies.

From reading the Ballmer memo to Microsoft employeesobtained by BoomTown’s Kara Swisher, it sounds almost like it’s back to square one for Ballmer and Microsoft:

“Third, we are going to reinvent the search category through user experience and business model innovation. We’ll introduce new approaches that move beyond a white page with 10 blue links to provide customers with a customized view of their world. This is a long-term battle for our company—and it’s one we’ll continue to fight with persistence and tenacity.”

Again, this is sounding the right notes. As I wrote last Monday, after shareholder activist Carl Icahn reached a settlement with Yahoo, the best and only really way to beat Google is through innovation, and not through acquisitions:

I’ve never been a fan of Microsoft’s bid for Yahoo, even if I thought it was likely to happen. There aren’t many cases where two also-rans teamed up to dethrone a leader in an industry. (Hewlett-Packard may prove the exception with its Compaq deal.)

And even if they reached terms, it would take months to get regulatory approval and longer to integrate.

That would give Google far too long to figure out its own problems, like how to make a buck off of YouTube and how to expand into display advertising, extending its already formidable lead.

The best way to respond is also the hardest: Innovate.

Unfortunately, I don’t really believe it’s over. Many folks who are following this saga ask me, “Can you believe this is still going on? Can you believe it’s lasted this long?” Yes. It’s not as unusual as you think. Remember, usually these things are happening quietly, behind the scenes. Talks rev up, they sputter, they break off, and then they begin again a quarter or two later. Negotiating such deals is delicate, especially when you add the combustible elements of money and ego. The fact that Ballmer decided to make his bid public earlier this year was a sign of desperation.

When it comes to online, Microsoft is a disaster. Ballmer will wait and watch to see what Yahoo CEO Jerry Yang and his new best friend Icahn can do the rest of this year. If Yahoo continues to stumble as it did this most recent quarter, expect shareholders to agitate for a deal. A significan drop in the stock will make for an incredible tempation for Ballmer.

So, don’t believe it’s over. Don’t expect a deal tomorrow, either. But in this case, the fat lady is just getting warmed up.  


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