Without Yahoo, Microsoft remains alone on the Web

By Daisuke Wakabayashi - Analysis

SEATTLE (Reuters) - 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 5 percent 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 percent, to $29.08. The stock rose 3 percent 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."