So, what should Microsoft do next?
I think Ballmer exhibited a stroke brilliant gamesmanship on Saturday last to walk away from the deal with Yahoo. He made a fair offer and even upped it a bit (about $5 billion!) and Yahoo was more greedy. It was a great deal from Yahoo's perspective but the management team did not see it and may regret that decision in the not-so-distant future. I see three possible options for Microsoft:
One: Develop the Online Offering Alone. It is a sensible, rational approach since Microsoft can commit significant financial resources. It can also selectively make smaller acquisitions to plug-in the gaps. This option requires patience and sustained commitment to develop the capabilities for the long-haul. Microsoft has shown that it can adopt a long-term orientation before--look at XBox, Zune, Windows Automotive and Windows Mobile. In these arenas, Microsoft shied away from making acquisitions (I am sure it could have made bids for Nintendo or Sony or Garmin or Motorola). Except for Zune, Microsoft is a credible competitor in the other three. So, if it pursued this option, it will be following strategic routines that it has established over the last decade.
Two: Pursue Facebook. On the face of it, Microsoft and Facebbok seem to have friendly relations. Facebook rejected an offer to sell out to Yahoo a few years back but accepted a minor equity stake by Microsoft. Facebook is successfully wooing executives from Google and seems to be an attractive magnet for top-talent. Microsoft seems to have lost that coveted position. By creating some clever combination with Facebook (including acquisition if Mark Z is willing to sell), Microsoft is showing that it is betting on the next wave of online commerce (rooted in social networks). Here, Google is behind for sure. By walking away from Yahoo and aligning with Facebook, Microsoft is embracing a future vision that goes beyond today's model of online advertising (defined by Google and Yahoo). It could be like Microsoft buying Hotmail for $650 million during the very early days of email.
Three: Pursue Salesforce.com. I know it is a radical recommendation but it is not inconceivable. One can put aside bitter animosity and enmity for creating a powerful business model. Microsoft tried (somewhat half-heartedly, I believe) to acquire SAP but Salesforce.com gives Microsoft the building blocks to port its traditional business to the new network-era business infrastructure. Its traditional cash-cows need protection and redefinition. Microsoft may not only have to pay a premium (it is today valued around $ 8 billion) but more importantly persuade Marc Benioff to see the value of combining (or at least working in strong partnership) with Microsoft. Bill Gates could appear even more statesmanlike as he leaves the day-to-day operations by signaling that he is created a solid foundation for Microsoft to win in the software-as-services (SaaS) arena.
Just some thoughts as I reflect on the opportunities and challenges facing Microsoft.