Roundtable on Yahoo minus Microsoft: Who wins for losing?

There's a saying here in Indianapolis when someone starts falling behind: We say he's "lost the lead lap." Last weekend, Microsoft may have faced a critical moment in its race for online leadership. Does it realize how far behind it is?

With AOL's Platform-A now commanding the largest reach of any online advertising platform worldwide, there's respectable analysis that says Microsoft could now be considered the number four player in the online advertising space.

If Microsoft had absorbed Yahoo, it would certainly have gained a respectable position on the lead lap. Now instead, it faces the unusual prospect -- for Microsoft, at least -- of being excised from any discussion of online dominance. As long as consumers in general expect their online software to be free, the main method of monetization for Internet-based software will, to some large degree, be advertising. Right now, Microsoft is not the best positioned company to command attention for businesses' advertising dollars. Leveraging its existing Windows and Office brands might give it a modicum of respect in the online space, but it won't solve the monetization problem.

For a thorough discussion of where Microsoft goes from here, BetaNews assembled our team of experts we first invited to our roundtable on the day Microsoft made its public announcement:

Jarvis Coffin, CEO of Burst Media, which manages the Burst Network of resources and tools for advertisers and publishers -- a major competitor of DoubleClick;

Michael Gartenberg, vice president and research director of leading industry analysis firm JupiterResearch;

Carmi Levy, senior vice president of strategic consulting at AR Communications, an industry research and analysis firm based in London, Ontario;

Matt Rosoff, lead analyst with Directions on Microsoft, a firm that concentrates on all aspects of that single company.

"I think Microsoft dodged a bullet here in terms of this deal," proclaimed Burst Media CEO Jarvis Coffin, a company which itself caters to online advertisers, and which would have been a competitor to a combined Yahoo + Microsoft.

"I think that it was never clear to me -- and I don't think it was clear to a lot of people -- what they were going to get buying Yahoo except bragging rights, more tonnage, and a larger share of the search market," Coffin continued. Certainly Microsoft CEO Steve Ballmer was within his rights to have been worried about its relative position against Yahoo and Google in the search field, which is where many perceive the online advertising experience for consumers begins. But how fast could Microsoft have regained its $42 - 45 billion in investment in Yahoo, he postulated, mainly through a search-driven advertising strategy?

"I think the issue, otherwise, was always confusing to people: Microsoft buying Yahoo wasn't going to reshape the broader Internet landscape," Coffin continued. "It really wasn't going to be one-plus-one-equals-three-and-a-half; it was one plus one equals...two, which is fine, but that's not necessarily a compelling enough reason to go spend $42 billion."

JupiterResearch vice president and senior researcher Michael Gartenberg believes Microsoft may still end up spending something, just not $42 billion. "Depending on what happens in the weeks and months ahead, we may actually end up seeing Microsoft make another attempt at acquisition, and we may actually see them getting it for even less money than they were prepared to pay," he told us.

Major Yahoo shareholders were probably surprised, Gartenberg said, that Ballmer could just walk away from this deal, after having given the impression that he'd do whatever it took to make a deal. "What Yahoo shareholders may be saying this morning is, 'Hmmm, was that the wisest thing for the board to have done?' I don't think this drama is entirely over yet, but it's certainly over for now. There's really going to be two sets of pressures: one set of pressure on Yahoo executives to perform, and the second on Microsoft to articulate a post-non-Yahoo merger strategy on how they're going to define themselves in this age of the Internet."

Ballmer may do well to study the history of Jack Welch, the former chairman and CEO of General Electric. Welch had a strongly held rule that he didn't let any of GE's divisions become less than #2 in their respective markets for very long, without spinning them off. (That rule continually sparked speculation over if, or when, GE would spin off NBC.) If Welch ran Microsoft, with its online business slipping to fourth place, should Microsoft consider a similar spinoff?

"At this point, Microsoft certainly can't afford the status quo," responded AR Communications Senior Vice President Carmi Levy.

"In GE's case, they were a well diversified company with multiple core businesses, but they could easily remove one, add one, shift to another over time," Levy continued. "In Microsoft's case, its core business is inevitably headed toward long-term decline, and it has to replace it with something. And the most replaceable something that is, is an online advertising-based revenue model. Right now, the only source that it has for that is MSN, Windows Live, whatever they're calling it today. But they can't afford to walk away from it, because then essentially, they walk away from the model that, at some point, will ultimately will generate some of the revenues that will be lost as the market moves away from the desktop installed software paradigm."

Levy's view is that Microsoft doesn't have time left on the clock to build its online revenue center; at this point, it has to buy it. "They're going to buy something; if it isn't Yahoo, it's something else, because this is a market that, even though they're not #1, even though they have been 'lapped,' so to speak, they've already bet the future of the company on making money here, and they can't afford to fold up their tents and go home."

Next: Does Platform-A become part of Microsoft's 'plan B?'