Microsoft's options, post-Yahoo

Poor Steve Ballmer. Having yanked his offer to buy Yahoo, Microsoft Corp.'s CEO is left to run a $57 billion company that is on track for its annual orgy of profits and continues to dominate several software spheres. And he still gets to decide how -- or even if -- the company should spend its $26 billion cash hoard.

But these aren't breezy times for Microsoft or its top executive. There's a growing sense outside of the company that it needs to make major changes if it wants to continue thriving. For example, Gartner analysts claimed last month that Windows is "collapsing" under its own weight. And George Colony, CEO at Forrester Research, said in his blog this week that a wholesale reformation is required at Microsoft.

[ For the complete saga of Microsoft's unsuccessful bid to take over Yahoo, check out InfoWorld's  special report ]

In particular, Ballmer needs to move quickly to shape Microsoft's strategy for the Web, where, with a few exceptions, it remains a laggard behind Google and other online rivals.

That can hurt Microsoft's chances with some users even when its online offerings are equal to Google's technically. For example, the University of the Pacific in Stockton, Calif., recently joined other schools in deciding to roll out the Google Apps suite instead of Microsoft's similarly free Live@edu package.

"On paper, Microsoft's and Google's products looked exactly the same," said Rob Henderson, director of cyber infrastructure at the school. But a poll of the university's 6,000 students showed that a majority preferred Google's technology, Henderson said.

Dana Gardner, an analyst at Interarbor Solutions LLC in Gilford, N.H., said that Microsoft "needs to become No. 1 or No. 2 in online consumer and business 'something' before its Office and desktop Windows franchises go into slow-growth and/or maintenance mode."

So how can Microsoft try to catch up on the Web, now that its bid to buy Yahoo is off the table? There are three main options:

1) Forget about Yahoo and look elsewhere. Abandoning what had become a $47.5 billion cash-and-stock offer for Yahoo showed that Microsoft is belatedly coming to its senses, said Enderle Group analyst Rob Enderle.

One upside of the failed merger attempt, he added, is that it opened up possible opportunities for Microsoft with News Corp. and Time Warner that may "turn out to be both less risky and more lucrative than [buying] Yahoo would have been."

Under that scenario, News Corp.'s MySpace social networking unit or Time Warner's AOL subsidiary could become new candidates for acquisition or partnership deals.

Each has some potential appeal for Microsoft: MySpace is essentially the Windows of the casual social networking market, while the "A" in AOL could well stand for advertising at this point. AOL's online ad network delivers 3 billion banner ads daily, tops in the U.S., and reached the most Internet users of any network in March, according to market research firm comScore Inc. And AOL's Web properties collectively rank as the fourth most popular in the U.S., behind those of Yahoo, Google, and Microsoft.