Why Microsoft Will Sit Out the Yahoo-AOL Dance (and Bide Its Time to Capture Search)

While a lot of analysts and pundits have suggested that Microsoft would or should surely jump into the fray–now that AOL and Yahoo are talking merger more seriously, and especially since Yahoo’s stock has dropped in the $14 range–don’t count on it.

In fact, in what has to be the most Zen-like approach it has ever had, sources close to Microsoft’s thinking actually hope that the talks to combine the Time Warner (TWX) unit and Yahoo (YHOO) will work out.

Why? Because, although some think such a merger would leave Microsoft’s digital aspirations out in the cold–since both AOL and Yahoo are now allied with its archrival Google–the software giant sees the pair coming together as yet another chance to get what it really has wanted all along from Yahoo.

That would be Yahoo’s declining but still significant search business and another shot at AOL’s.

Let’s be clear–Microsoft (MSFT) wants nothing else from Yahoo anymore, according to numerous sources, even though it made a noisy and ultimately failed attempt to buy the Internet giant.

It will not be making another bid, sources said, echoing Microsoft CEO Steve Ballmer’s public and internal pronouncements on not revisiting another Yahoo takeover bid.

But Microsoft is hoping that if Yahoo and AOL merge, the new company will see that its fate lies more in its advertising, content and communications businesses, and not in search.

Microsoft is also figuring that regulators will not allow AOL to continue its search ad partnership with Google, a deal that the software giant lost out on. As part of that deal, Google (GOOG) got a five percent stake in the AOL unit.

But, once AOL is combined with Yahoo, execs at Microsoft hope it will give them the in they have been looking for to reignite failed talks with Yahoo over a search deal that Google also won.

That Yahoo-Google deal to outsource some of its search ads is now being studied by the Justice Department, which is seriously considering blocking it. Microsoft hopes it will founder, which it is more likely to do if Yahoo combines with AOL.

Thus, Microsoft just waits.

It will be interesting to see if this snake-in-the-grass strategy will work for Microsoft, which has yet to come up with an effective online strategy in the consumer space and must still find a digital head.

Ballmer continues to want to nab an outside superstar exec for the daunting job–the names of some former Microsoft execs like Brad Silverberg and Paul Maritz have even been raised internally–much to the chagrin of the leading internal candidate, Brian McAndrews.

Now that appointment is starting to feel like a really complex two-step.

Until it all sorts itself out, what a good opportunity to post this most popular of all online videos–101 million plays!–on YouTube, “The Evolution of the Dance”:

Print Share 2 Comments Tagged: BoomTown, Google, Internet, Kara Swisher, Microsoft, Yahoo, advertising, digital, search, video, AOL, Brad Silverberg, Brian McAndrews, deal, merger, Paul Maritz, Steve Ballmer, takeover, The Evolution of the Dance, Time Warner, YouTube | permalink

Follow Kara on Twitter | Follow AllThingsD on Twitter