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 May 6, 2008 Tuesday
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SECTION: MONEY; Pg. 2B

LENGTH: 664 words

BYLINE: Byron Acohido

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SEATTLE -- Microsoft may yet reel in Yahoo.

That's a prevailing sentiment among Wall Street stock analysts and Internet advertising experts following Microsoft CEO Steve Ballmer's withdrawal of the software giant's sweetened $47.5 billion offer to acquire Yahoo.

The unfolding of that scenario assumes angry Yahoo shareholders file lawsuits against CEO Jerry Yang for not accepting Ballmer's offer, and that Yahoo's recovery plan stalls out.

Ballmer could plausibly return a few months from now with a similar -- or even a lower -- bid for Yahoo. Venture capitalist Todd Dagres of Spark Capital calls it the crocodile strategy.

"Instead of trying to swallow Yahoo while it's still thrashing about, you let the stock drop and let the shareholders get good and nervous," says Dagres. "In essence, you drag Yahoo to the bottom of the river, stick it under a rock and eat it later, when it's cold and soft."

Ballmer declined an interview request. However, on Saturday he issued a memo to Microsoft employees signaling that he will no longer pursue Yahoo, and instead will focus on internal growth of the company's numerous online initiatives.

"We are 100% focused on executing this strategy, and we have made good progress in a very short time," Ballmer wrote to employees.

Yet, Microsoft's pivotal weakness remains as glaring as ever. Despite pouring billions into its MSN and Live.com Internet properties, the company has been unable to win more than 9% of Internet search queries. Google dominates the all-important search query market with a 60% share, followed by Yahoo's 21%, according to measurement firm ComScore.

Search queries are like gold to advertisers. The words you type into a search box clue them into what you're thinking about buying. Acquiring Yahoo would have given Microsoft a 31% share of search queries -- and instantly put it within striking distance of Google.

But Yang's holdout for a higher price gave Microsoft executives time to thoroughly hash out the proposed merger with subordinates, many of whom came from Yahoo. Senior managers had months to dwell on how difficult the blending of two tech giants with disparate cultures would be, says Kevin Lee, executive chairman of Didit.com, a search advertising consultancy.

"It is extremely difficult to integrate and innovate simultaneously," says Lee. "And Microsoft already has several integrations underway."

Internet advertising analyst Shar VanBoskirk at Forrester Research says "the astronomical price" Yang tried but failed to get from Ballmer can now support "a lot of internal research and development" at Microsoft.

Ballmer still clearly wants to supplant Yahoo as a strong No. 2 in search queries as quickly as possible. "Now, they just have to do this without Yahoo," says VanBoskirk. "And after going through the soap opera of the last three months, I think Ballmer might be a bit relieved."

However, the spotlight now reverts to questions about Microsoft's inability to grow its share of the search query market internally.

At least some of the billions Ballmer was willing to spend on a recalcitrant partner can now be directed at more aggressive plans to get folks to regularly use MSN and Live.com search.

"Investments will likely be across multiple fronts, such as product development and marketing and promotions," says Sid Parakh, tech stocks analyst at McAdams Wright Ragen.

The software giant could additionally seek alliances with other players who command notable shares of the search query pie, such as AOL, Ask.com or eBay, says Didit.com's Lee. And it should do something about what it calls its search engine, he says.

"Microsoft needs loyal searchers on either MSN or Live.com," says Lee. "Both are poor brand choices, in my opinion. Microsoft needs a search brand name that can become a verb in order for people to refer to a search there. You can Google someone, you could even potentially Yahoo someone, but you can't Live or MS someone."

Microsoft shares closed Monday at $29.08, down 16 cents.

LOAD-DATE: May 6, 2008