OK, so what's Microsoft's plan B?
The company has said it has a strategy with or without Yahoo. But just what is Microsoft going to do to take on Google?
With Yahoo apparently off the table, it's time to see what Microsoft's back-up plan looks like.
Microsoft has said for some time that it has a strategy with or without Yahoo, but it's a strategy clearly in need of a jump-start.
In search, for example, Microsoft has been trying to take on Google for some time, but it remains a distant third in search queries and also has struggled in the all-important battle of monetizing each search query.
Microsoft outlined two key reasons for buying Yahoo--adding its talented engineers and getting the significant boost in scale that would come from buying the No. 2 player.
Clearly, Microsoft could use just a fraction of those billions and get a ton of engineering talent. The scale problem, however, is a more challenging one. As Microsoft CEO Steve Ballmer himself said in a meeting with employees on Thursday, there just aren't that many companies out there with any significant scale.
As for where else the company may look, Ballmer's recent comments to The Wall Street Journal offer a cheat sheet to the short list.
"There's really only five or six that really have any scale," Ballmer said in that interview. "Worldwide, you'd maybe get seven or eight."
Among those companies with scale that Ballmer named were Facebook, MySpace.com, and AOL, along with the Yahoo, Google, and Microsoft itself.
Although Facebook and MySpace have huge audiences, selling advertising against those sites has proved to be trickier than in search. Plus, Microsoft had to agree to a massive $15 billion valuation for Facebook just to get an ad deal and a small slice of the company. MySpace, meanwhile, has an add tie-up with Google. AOL is certainly seen as in play, having been a frequent rumor target as a potential partner for Yahoo.
Still, Ballmer said in his letter to Yang and in a public statement that he will look at other business moves and may expect other deals to follow.
"I wouldn't be surprised to see Microsoft going on a buying spree to buy some of the things they thought they might be getting from Yahoo," said Gartner analyst Allen Weiner. "I think they'll look seriously at some of the significant Web 2.0 companies and what they might add to the Microsoft label."
There's also the possibility that Microsoft makes another try at Yahoo once the dust settles a bit. I'll explore this in a follow-up piece.
News.com's Stephen Shankland contributed to this report.