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Microsoft and Yahoo: Now What?

When Microsoft ended its three-month chase to buy Yahoo! Inc. early last month -- it officially withdrew on May 3 -- many industry observers heaved a collective sigh of relief. Most felt the deal would have been bad for both parties, if not the industry as a whole.

Now it raises another set of questions about the strategy each company intends to pursue against Google Inc., their common rival.

One critical reality Microsoft must face with the failure of the Yahoo! deal is it probably can't count on buying its way into any major new online markets any longer. The deal's collapse likely forces Redmond to think about changes -- sweeping changes in some cases-that it needs to make to compete sans Yahoo! against Google and companies like

Salesforce.com Inc. For several years now, Microsoft has faced the specter of having to fundamentally change its development model and even its basic business model to be a more nimble competitor in this new age.

Now Microsoft is standing eyeball to eyeball with that era. The company can no longer afford to continue turning out the typical releases of Windows (and certainly not something that turns out like Windows Vista), Office and its established lineup of server-based applications. It needs to significantly narrow the technical gap between its online-based products and services and those of Google. That may take more than just delivering better features and updating the architecture of those products.

Yahoo!'s Jerry Yang (left) and Steve Ballmer of Microsoft (right).
Yahoo!'s Jerry Yang (left) and Steve Ballmer of Microsoft (right).

Redmond will also have to change the mindset of its employees and the flavor of its corporate culture, and do more than a little tinkering of its business model. For instance, the company has made lavish profits from selling physical copies of its desktop and server products either directly or through its resellers. It will have to figure out a new distribution model for the online age that may not involve many of those resellers.

About the Author

Ed Scannell is the editor of Redmond magazine.

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