Analysts to Microsoft: 'Yahoo? Time to Move On'

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Remember that feeling as a kid when you had a crush on someone but that person obviously preferred the company of someone else – two’s company, three’s a crowd?

Microsoft execs must have that left out feeling about now.

After formerly pursuing Yahoo (NASDAQ: YHOO) only to have the number two search player not only reject Microsoft’s (NASDAQ: MSFT) advances but to have the Yahoos announce an expanded advertising deal with arch competitor Google (NASDAQ: GOOG) Thursday, the Redmondians are currently the wall flowers of the dance.

The key question is ‘What will Microsoft do now?’ Or perhaps that would be What ‘should’ Microsoft do now?

There’s certainly no shortage of pundits and other observers with views and advice for what Microsoft in general, and CEO Steve Ballmer specifically, should do next.

Perhaps the biggest thing is to re-focus on the company’s fundamental markets, such as platforms and tools, said Rob Enderle, principal analyst at The Enderle Group.

In recent years, Microsoft has gotten involved in search and advertising, in entertainment and games, in music players and mobile phones, in home networking, in Live services for both consumers and businesses, and other non-core businesses. Most of those businesses, some of which Microsoft has been investing in for a decade or more, are either not making money yet or are making very little.

“They’re all over the map right now … they need to decide what they’re going to be when they grow up,” Enderle told InternetNews.com.

To that end, perhaps Microsoft has been too distracted by its overweening desire to dominate search and online advertising tied to search, he added.

Dana Gardner, principal analyst at Interarbor Solutions, agrees.

“They have to get off their obsession with search,” Gardner told InternetNews.com. “There have to be other ways to skin a cat than search.”

In fact, several analysts said, Microsoft has lots of pans in the fire and some of them – for instance, its “cloud” services initiative – could provide a much bigger payoff than search over the short- to mid-term.

“I don’t know if [buying Yahoo] would have provided them with what they needed, and I’m not sure that was the best way that Microsoft could have spent $40 billion plus,” Charles King, principal analyst at Pund-IT, told InternetNews.com.

“Compared to Google, even with Yahoo, Microsoft still would have had a small fraction of the market,” King added.

Additionally, the online advertising marketplace is still in its early stages – a point that Microsoft officials have said repeatedly in recent months. Paying a premium for market share in such a nascent market may not have provided what Ballmer and company were hoping for.

“I think that it’s important to note that online ads are still a small part of overall advertising spending worldwide,” King added.

Still, Enderle and others, don’t see Microsoft giving up on its search fetish any time soon.

“You’ve got mail?”

So, given that penchant, what can Microsoft do to increase its chances with search and search advertising? It could, for example, buy up smaller search providers – such as AOL – suggested more than one observer.

“I think you’re going to see them be pretty aggressive in shoring up their own search and display business [because] I would assume they’re not out of the buying market yet,” Gartner analyst Andrew Frank told InternetNews.com.

Frank was suggesting that Microsoft would now be freed up to go after some of the large, independent ad networks still around, like ValueClick. “I don’t think you’re going to see a slowdown in M&A activity in this area.”

This article was first published on InternetNews.com.