Analysts speculate on Microsoft

Now that Microsoft Corp. has walked away from its takeover bid for Yahoo Inc., the tech world is turning its focus on the Redmond, Wash. giant’s next move. And for some analysts, Microsoft may still be in good shape to cut into Google’s online search and advertising stranglehold without Yahoo’s help.

Three months ago, Microsoft expressed its desire to stay relevant in the online market with its US $44.6 billion bid for the Web’s second biggest search engine. Microsoft sits a distant third to Google Inc. in online search and also lags behind the Mountain View, Calif.-based search empire in attracting advertisers for paid search ads. But with the Yahoo sweepstakes now over (at least for now), some analysts are saying that if Microsoft can refocus on its own online efforts, it can challenge for online supremacy.

“The problem with going after only a search business is you’re fighting Google’s game,” Charlene Li, vice-president and principal analyst at Forrester Research Inc., said. “What Microsoft needs to do is redefine the game.”

To accomplish this task, she argues, Microsoft must to stick with its current online advertising strategies, which includes continuing to integrate its recently purchased advertising network aQuantive into its services. Li said the fact that Microsoft has such a large user base with MSN and its other communication properties, gives it a good starting point to differentiate itself from Google.

“One of the promising things Microsoft has done recently is open up the address book in Hotmail, so users can integrate their contacts into Facebook, without giving up their username and password,” she said. “Over the past three months, while Microsoft has been occupied, they haven’t been as focused on the competition and on innovations like these.”

And while nobody is debating the difficult battle Microsoft will face in trying to catch up with Google’s search, some analysts see the software giant a lot closer than previously thought in the online advertising market. Matt Rosoff, analyst at Kirkland, Wash.-based Directions on Microsoft, said Microsoft will continue to pursue the ad deals it’s created with companies like Facebook, in addition to possibly striking a side deal with Yahoo as well.

“I don’t think Microsoft would be against striking some sort of advertising partnership with Yahoo,” he said. “That’s probably what it really wanted all along and the acquisition was one way to do that and to get some other benefits at the same time. But if it could get the advertising platform on Yahoo search, Microsoft would probably be very happy with that.”

Another rumour in the aftermath of the failed Yahoo deal is that Microsoft might be interested in AOL. Platform A, AOL’s online advertising network, is the largest in the U.S., and there has been heavy speculation that Time Warner Inc. is considering spawning off the AOL division as its own entity. According to Rosoff, Beijing-based search giant Baidu – which he said holds about 10 per cent of the search market – could also be a possibility for Microsoft.

As for Microsoft’s enterprise strategy, Forrester principal analyst Rob Koplowitz said he was interested in seeing how Yahoo’s expertise in creating large data centres and highly scalable applications would have translated over to Microsoft. But despite this, he said, Microsoft’s recent software-as-a-service (SaaS) focus and data centre plans will still be in good shape without the merger.

“I just think Microsoft plans to do this on its own now,” Koplowitz said. “It’s already announced SaaS for Exchange and for SharePoint, and it’s pretty well articulated what its data centre plans are going to be, so they don’t need an acquisition to get where they want to go. In terms of its enterprise business, I think Microsoft will just keep steaming along.”

But for as long and drawn out as this takeover bid has been, Rosoff said, there’s always a chance Microsoft reconsiders and eventually comes back to the table.

“It all depends on how things evolved over the next three to six months,” he said. “If Yahoo continues to report quarterly earnings that aren’t particularly good and shareholders get angry and replace the current board and executive leadership, Microsoft could come back.”

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