Michael Pascoe writes:

Hot on the heels of Microsoft’s quarterly results showing its MSN business was the only one to suffer a fall in revenue, TheWall Street Journalreports that the world’s biggest software company is thinking about buying Yahoo or joining forces with it in some form or other to take on Google:

Microsoft’s recent quarterly results provided a picture of the pressure it faces from Google. On Thursday, Microsoft said the MSN unit fell into the red and its revenue declined. Those numbers show it is failing to capture the same online-advertising tail wind that is helping Google. By contrast, Google’s first-quarter net income rose 60% from a year earlier to $592 million. U.S. online advertising generally rose 30% to $12.5 billion last year, according to the Interactive Advertising Bureau trade group and consulting firm PricewaterhouseCoopers.

Microsoft executives also said they will need to boost investments in online businesses in the next fiscal year to levels far higher than Wall Street had expected. That prompted an 11% selloff of Microsoft shares Friday. The stock has ticked lower this week. In 4 p.m. Nasdaq Stock Market composite trading, shares fell 1.2% to $24.01, after hitting a 52-week low during the day of $23.90.

At its core, the clash between Microsoft and Google centers on Microsoft’s attempt to build up its Web-search and online-advertising businesses, and Google’s push to broaden its own offerings onto Microsoft’s traditional turf.

A Microsoft-Yahoo deal? It sure would have an interesting minor media fallout at the far end of the world: how would a merged Microsoft and Yahoo go merging Yahoo7 and ninemsn?

Peter Fray

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