Microsoft takes its ball and leaves Yahoo on the Web 2.0 playground

Some -- probably many -- are going to portray Microsoft's decision announced on May 3 to withdraw its Yahoo bid as a victory for Yahoo and a defeat for Microsoft Chairman Steve Ballmer & Co. Me? I see this as the smartest thing Microsoft could do.

In fact, I'd go so far as to say Microsoft's decision to walk restores my faith in the future of the company. (Update: Looks like I'm not alone. Mini-Microsoft, for one, is savoring some Col Solare to celebrate the nixing of the potential partnership right now....)

There are so many other things Microsoft could do with $44 billion -- both in the online ad market, as well as in making sure its other non-services-centric businesses remain solid.

According to a letter sent to Yahoo CEO Jerry Yang by Ballmer on May 3, Ballmer said he was unwilling to up Microsoft's bid to $37 per share, which was what Yahoo and its board wanted. Ballmer also made it sound like he's not interested in swooping back in and making another bid for Yahoo if and when its stock price tumbles, as many are expecting. There's also a not-so-veiled threat in Ballmer's note, regarding Microsoft's intention to do everything in its power to make sure antitrust regulators squash any kind of Google-Yahoo ad deal.

Update: Yahoo Chairman Roy Bostock issued a couple of hours after Ballmer's letter was released a statement on the failure of the deal to come to fruition:

 "We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo! for success and leadership in its markets. From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view. Yahoo! is profitable, growing, and executing well on its strategic plan to capture the large opportunities in the relatively young online advertising market. Our solid results for the first quarter of 2008 and increased full year 2008 operating cash flow outlook reflect the progress the company is making."

All along, many Microsoft watchers, including yours truly, have noted that there was an awful lot of overlap between Microsoft and Yahoo. Yahoo's open-source-based platforms and strategies would no doubt be tough to combine with Microsoft's Windows-centric ones. And it wasn't just Yang and some Yahoos who didn't want the deal; many Softies didn't either. Yes, Microsoft would have gotten Yahoo's ad inventory to combine with its own, making a combined Microsoft-Yahoo ad network more appealing to publishers and advertisers. But was that really worth $44 billion?

Microsoft execs have said before that in the Web 2.0 world, Microsoft's money -- even when there's a lot of it -- often isn't good enough to convince companies to do a deal with a company they see as the devil. This time, Microsoft's Evil Empire reputation saved it from making a very bad move.

Do you agree? And what do you think Microsoft should do now with that $44 billion burning a hole in Chief Financial Officer Chris Liddell's pocket?