Microsoft: 'We've Moved On' From Yahoo

Days after Microsoft withdrew its $40 billion-plus bid for Yahoo, one of its top online services executives stood before financial analysts at the Merrill Lynch Technology Conference to again assert that the Yahoo ship has sailed, and that Microsoft would be pushing forward alone.

"Yahoo would have been an accelerator, but we've moved on and now we're focused on how fast we can grow organically," Brian Hall, Microsoft's Windows Live general manager, said at the conference. "They would have brought significant assets, but we've moved on. You're going to notice a trend there."

Hall said he had several goals for Microsoft's online business, including creating a killer application for Windows through Windows Live, using contextual information from Hotmail and other Microsoft Web applications as a way to drive display advertising across Microsoft's sites and third-party Web sites, pushing into contextual search that takes place outside the usual search engine home page and growing Microsoft's online partner base.

Hall said that Microsoft already had achieved a strong position on the Web, with 448 million active visitors logging into Microsoft's online services last month, and Microsoft's sites accounting for 11% of the total amount of time spent on the Web worldwide.

Still, Yahoo would have brought additional scale to compete with Google, which accounts for a much larger chunk of the online search and search advertising market. Microsoft's share has remained steady, even dipping slightly, in that market over the last few years. Asked about how Microsoft could overcome the loss of Yahoo's scale, Hall referred back to the improvements Microsoft's making and has made to its online services."We're bearing down in the last little while," he said. For example, he added, Microsoft has quadrupled the size of its search index in the last year, completed the aQuantive acquisition to give it a strong position in the growing display advertising market, begun pulling Windows Live into a cohesive suite of applications, and kept Live Messenger growing.

Microsoft will soon begin combining elements of its MSN Web portal and Windows Live by adding things like an e-mail notifier and presence indicator as well as other social networking features into MSN, according to Hall. A test of that integration in the United Kingdom drove higher user engagements and more site visits.

So far, Microsoft has had limited success with social networking, but Hall hopes the company can turn that around by turning social networking more into a feature than only a destination, as it largely is today with sites like Facebook and MySpace.

"From a total number of users, we have done well, but engagement is very low," he said. "Rather than taking a verticalized approach where everything is about the application, where we see this going is more of a horizontal approach, where I have a set of contacts and they have context, but it's available in all the applications that I use. The fact that I get an instant message from someone doesn't mean it can't show up in my e-mail in-box, the same with social networking."

Hall said that despite Microsoft's position far behind Google in Web search, there's still an opportunity to contend. "We definitely can gain share in search," he said. He pointed to opportunities in search outside of the search homepage where users can do Web searches from within other sites and Web applications, and said the large number of still unanswerable queries present an opportunity to make search algorithms better.

Though Microsoft also lags far behind Google in advertising, Hall said display ads remained a significant opportunity for Microsoft. Most of Google's ad market comes from text ads that appear alongside search results."Even if [we] don't grow in search, [we] can still grow in ads via display advertising with companies like Coca-Cola," Hall said, adding that continued research and a large footprint should give Microsoft good information to target ads. "As we get more to the root causes of what causes a click-through in an ad, [ads] can move back from search and it ends up getting a much larger share of the advertising for us."

In an e-mail to employees as well as a statement on Saturday, Microsoft CEO Steve Ballmer hinted that future acquisitions and partnerships would be part of Microsoft's strategy in making up for opportunities lost in the failed Yahoo acquisition. One of the possibilities being floated by financial analysts and others is that Microsoft buy or partner with AOL, partially in order to bolster its ability to push display ads.

Asked about AOL, Hall wouldn't comment on how the company would be interesting to Microsoft. He did note that AOL was in a strong position in the instant messaging market, but that it had outsourced its search assets to Google and hasn't been gaining share in any of its markets.