Any deal between Microsoft and Yahoo is probably off - so then what?

Microsoft said Thursday it's "done" trying to acquire Yahoo, but while some might be cheering yet another interruption Microsoft's relentless pursuit of its rival, others are pointing to a compelling need for the company to start making money from its online operations.

"I think the chances of our buying Yahoo [are] so small that they are essentially negligible," said Microsoft CFO Christopher Lidell, at a Microsoft analysts meeting yesterday.

Liddell also told the analysts that a search deal with Yahoo still might happen. But Liddell indicated that it would need to occur soon, in that Yahoo is a "declining asset."

"Yahoo, for us, was always a tactic, not a strategy....We're done, we can move on," Microsoft CEO Steve Ballmer said at the same metting. But then, the CEO hedged.

"Does that mean that nobody will ever talk to anybody again? I suspect that the answer to that question is also no," Ballmer said. "It's a long time and a big world."

This week isn't the first time Microsoft has walked away from a possible Yahoo pact. In March, Microsoft took its huge acquisition bid off the table, only to turn around later and make an unsuccessful try at Yahoo's search engine.

By and large, though, analysts attending Microsoft's event seemed exceedingly tired of hearing about a Yahoo deal, according to a live blog in Barron's.

"This is a tough room. The majority of money managers in Redmond today -- even those who remain Microsoft shareholders after the Yahoo (YHOO) dance -- are skeptical about Microsoft CEO Steve Ballmer's obsession with Internet search. They are also frustrated with the company's endless penchant to spend, investing in just about anything it desires, often acting like a private company," blogged Mark Veverka.

Yet Microsoft's online division lost $1.23 billion over the past fiscal year, and it has now posted losses over eight consecutive quarters.

According to Walter Pritchard, an analyst at Cowen & Company, analysts attending the conference want to come away with some comfort about Microsoft's Internet strategy.

"Buying" rather than "building" could be the fastest way for Microsoft to beef up its Internet revenues, according to some. However, also at the meeting, Ballmer seemed to defend himself against anticipated opposition to Microsoft's high flying spending, particularly on Internet properties.

Talking to the analysts, he justified the company's fiscal year 2008 operating expenses of $24.8 billion, up from $21.8 billion a year ago. as an "investment" rather than marketing expenses.

"There is this huge, huge opportunity around the Internet and online and we have to embrace that opportunity and invest in that opportunity," Ballmer said.

Yet according to Veverka, investors "would like to see more of the company's phenomenally consistent revenue growth -- about 15% a year over the past three years off a huge base -- hit the bottom line."

What would Microsoft have gained from Yahoo, anyway? Beyond gobbling up share in the search and/or ad markets, some observers are suggesting that Microsoft's been seeking some mysterious patent in Yahoo's portfolio.

Usman Latif, for example, theorizes that Microsoft is after a paid search patent called the "361 patent" which Yahoo obtained through its buyout of Overture back in 2003. Google, however, might be the actual owner of that patent now, anyway, through a stock swap accomplished prior to its initial public offering (IPO).

People are also speculating about Microsoft's remaining alternatives, if a deal with Yahoo isn't about to come to pass. By many accounts, Microsoft's Live Search Cash Back program -- which gives cash back to consumers who buy products through searches on Live Search -- is faring well, pushing the company's market share up in recent figures from comScore.

Other observers see Live Mesh -- Microsoft's recently announced online platform for synchronizing data on different machines -- as a potential starting point for Microsoft to move more of its products online.

"There's at least a trillion dollars just of media, communications, and advertising, not all of which we can capture, but we don't have a lot of trillion dollar markets that are being transformed," Ballmer said. "That's such a big opportunity that at least at our scale, our size, our market cap, we have to seize and go after those opportunities."

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