The Microhoo Fallout

Microsoft’s withdrawal of its offer for Yahoo ended a three-month saga replete with big bucks, big egos and big implications—for the companies involved, for their customers and for the industry in general.

Even after Microsoft raised its bid for Yahoo by $5 billion, to $47.5 billion, negotiations fell through. Microsoft CEO Steve Ballmer said his company increased its offer to $33 per share—from the $31-per-share cash-and-stock bid that it initially made Feb. 1—but that Yahoo was looking for $37 a share.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Ballmer said in a statement. "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal."

Microsoft sought to buy Yahoo to gain a stronger foothold in its battle with Web search leader Google, which is rapidly expanding into the software maker's own turf with new Web-based applications.

Indeed, the failure of Microsoft to acquire Yahoo could echo in the future of the enterprise market, with Google emerging as the lead horse in the race, according to Interarbor Solutions analyst Dana Gardner. Microsoft's abandonment of its Google bid will not only keep Google at the head of the online search and advertising markets, but could also have an impact on the future of the enterprise market.

Google is a relatively small player in the enterprise, selling search appliances to businesses and a collaboration suite that it hosts on its own servers as part of its cloud-based Internet services strategy. All told, these products are believed to constitute only 2 percent of the company's revenue.

Click here for 10 things we learned from the Microsoft-Yahoo fallout. 

But as the computing landscape shifts increasingly toward cloud computing, Gardner said, Microsoft's traditional client/server and packaged software model will be threatened. Businesses are already looking to use applications that Google hosts in its own data centers. Microsoft wants to get to the same place and needs Yahoo—or a company like it—to help do it.

"There's a great deal of consensus that the older approach of a client/server-based architecture is cost-inefficient," Gardner said, adding that the cost of maintaining a PC in many enterprises is more than $1,000 a month.

Moreover, Microsoft's laborious Windows Vista operating system rollout hasn't assuaged any of these pains, meaning businesses will look at alternatives such as cloud-based computing or SAAS (software as a service).

In effect, if a company like Google lets customers use applications for $12 per user per month, more businesses will be compelled to look at the cloud, Gardner said: "This will come down to a competition of cost. Microsoft is at a disadvantage because it's transitioning from a previous high-margin, on-premises software business to a more low-margin, high-volume cloud-based business.”

What Yahoo brings to the table as Microsoft attempts to dig into the cloud is a large audience in established Western markets, according to Ovum analyst David Mitchell.

“[Yahoo’s audience] would have provided a valuable additional customer base and distribution potential for Microsoft cloud-based offerings that are emerging and that will continue to emerge at an ever-increasing rate—with Yahoo engineering capabilities helping the acceleration of cloud services coming to market,” Mitchell said. “Microsoft needs to move on quickly rather than entering any period of mourning over what might have been.”