Microsoft without Gates

    Yahoo deal

    In addition, the company is focusing heavily on unique features for searching maps, video, and images. The chances of getting a typical information seeker to shift from Google to Live.com are small. But if you really can search video, for example, in a different way, perhaps Microsoft's brand cachet could grow. Another more blatant and costly play for search converts is Microsoft's recent deal with Hewlett-Packard (HPQ, Fortune 500) to make Live Search the default for browsers on that company's U.S. PCs. Google has a similar deal with Dell. One way or another, says Ballmer, "we've got to get scale."

    That's why he sought Yahoo. The more searches Microsoft gets in its inventory, the more money advertisers are willing to bid to buy ads. If Yahoo's new deal to subcontract with Google and combine some of their searches is sealed, it will be awful news for Microsoft, because Google will be able to charge even more to advertisers on every search.

    The failure of the Yahoo deal raises questions about Ballmer's judgment and decisiveness. Buying Yahoo would have enabled Microsoft to triple the size of its search business; Yahoo also has a far better brand appeal for online consumers. But though Ballmer initially made a very aggressive offer - 62% higher than the price at which Yahoo stock was then trading - he failed to seal the deal. After months of wrangling, he upped his offer slightly to about $47.5 billion. When Yahoo CEO Jerry Yang reportedly wanted a couple of dollars more per share (some $5.7 billion), Ballmer said his calculations showed it wasn't worth that much. He walked away and said the negotiations were finished. But they weren't.

    He and Kevin Johnson soon reconsidered, and on May 18, Microsoft instead proposed a deal to purchase Yahoo's search business for $1 billion and make an $8 billion investment in the company, which Yahoo also rejected. (Yang's unwillingness to deal with Microsoft has earned the wrath of shareholders, most notably activist hedge fund manager Carl Icahn.)

    Ballmer claims the deal's failure means only that more money and time will have to be invested internally and on other, smaller, acquisitions. But many observers in the tech world are wondering why he wasn't willing to follow through and pay up. "He's shown almost no aptitude for organically growing a business that can compete with Google," says George Colony, the CEO of Forrester Research. "So he had to acquire something. Yahoo was obviously the best candidate. But he failed in that too." Unless Microsoft comes back with yet another offer - always a possibility - it is likely to remain way behind Google for the foreseeable future.