Analysts also said Microsoft dodged a bullet by pulling back from the Yahoo deal because the issues around integrating Yahoo into Microsoft would have been significant. "Yahoo + Microsoft would have been a disaster," Forrester analyst George Colony said in a May 4 blog. "The best and the brightest from Yahoo would have gone to Google, the culture clash would have been destructive, it would have put Microsoft back in the sights of the regulators. And Yahoo wouldn't have helped Microsoft with its biggest task at hand-adapting to the emerging executable Internet software model.""Ballmer will have to reform: the culture, the people, the company's speed, how it sees software (it's not on shiny disks anymore), its design sense, its quality standards, its tired and annoying strategy of migrating its customers through predictable software versions, its old method of developing software (which produced the Vista flop)," Colony wrote. Forrester Research's Li said Microsoft must play to its strengths to achieve this reformation. "Rather than continue to chase Google's dominant search position, Microsoft should redefine the -battle' to one where search is an integrated part of the marketing mix," she said. "Microsoft has assets and relationships that [Google] doesn't have: 400 million user relationships through communication tools like Hotmail and Messenger, the aQuantive acquisition , [a] strong display advertising business, and investments/relationships like Facebook." What Microsoft needs to add to this mix is a strong search engine, a key issue moving forward, Li added. IT professionals contacted by eWEEK, many of whom are Microsoft customers, hope that Microsoft can keep its eye on core enterprise needs amid all the business machinations. "We did not see an acquisition of Yahoo having any direct benefit to us," said Tom Miller, senior director of IT at VNUS Medical Technologies and an eWEEK Corporate Partner. "We did have concern that it would distract Microsoft from its core business as they tried to join the two different cultures." Karl Herleman, CIO at Miami Dade College and an eWEEK Corporate Partner, said the merger wouldn't have made a big difference in the day-to-day operations of his organization, but that he was hopeful that a Yahoo acquisition would have strengthened Microsoft's position in the cloud. "[The merger] would have signaled that they are going to compete aggressively with Google and, hopefully, in the long run provide cost-effective solutions in the Internet cloud." Herleman may get his wish, as the fat lady seems not to have sung yet. Microsoft officials are talking it down, but there is the real possibility that, after a few months, Microsoft could come back for another try at Yahoo, particularly if Yang fails to get the company moving in the right direction. Yang already has told reporters since Microsoft dropped the deal that he would be open to further talks. At the same time, there have been reports that Microsoft has begun informal acquisition discussions with Facebook (Microsoft currently owns a relatively small stake in Facebook), Time Warner is talking with Yahoo about unloading AOL, and Google may be providing ad and search services to Yahoo. With regard to that last point, Yahoo needs to be careful, said Ovum's Mitchell. "Deepening the relationship with Google may be part of that plan, but this is where Yahoo needs to take care," Mitchell said. "The advertising relationship with Google may well have been attractive when Microsoft was chasing Yahoo, as something akin to a poison-pill clause, but it raises a serious question for an independent Yahoo. The basic question is, 'What does Yahoo want to be?'" Yahoo and Yang will have to ask themselves that question should Microsoft come courting again-likely, with less in its pocket than the $33 per share last offered. Yang "tried to bluff them," Yankee Group's DiDio said, "and he may have overplayed his hand." Clint Boulton, Jeff Burt, Joe Wilcox and Debra Donston contributed to this story.
Ballmer must now decide how to rework the company and its products to better compete in the online world against Google.