In my previous life working on Web Platform marketing for Microsoft, I had regular contact with a number of people in the Internet Advertising world.  Given the news over the weekend re: Microsoft’s withdrawal of its tender offer for Yahoo, it is probably a good time for me to write my first post about Microsoft.

I would estimate that the entire "internet marketing phenomenon" is totally lost on 30-40% of folks outside of the Adcenter & Windows Live groups.  Zero understanding whatsoever.  Mostly enterprise software veterans and folks who toe the company line, these would be the same folks who will tell you even still that Google (with its $180b+ market cap) is "just another Netscape."  I don’t think any of them could tell you why clickthrough advertising was/is important and why auction-based business models are fundamentally superior to almost any other in almost any situation.  I remember giving presentations and pitches about the importance of internet advertising and I’d get a blank stare from at least 1 in 3 people.  It was probably the most frustrating part of my time at Microsoft.  While I’m seeing the market evolve, we’re still debating over whether or not it is important in 2008.  Aaaarrrrggghhhh!!!

So it probably should have come as no surprise to me that the reaction on Mini-Microsoft was so positive — some people are even suggesting a dramatic increase in the investment in Windows!!!?!!?

But what a lot of people are missing is that Microsoft really needs its next growth engine.  Windows and Office are for all intensive purposes growing at the rate of inflation, and that may even be negative if it weren’t for the effectiveness of Genuine Advantage (pure speculation on my part here.)  Server & Tools has grown at a 15%+ rate for the last several years, but can that really continue?  Growth from Home & Entertainment and Online just isn’t big enough to keep top-line & bottom-line revenue growing at a rate that investors expect.  And the entire company currently benefits from an extremely favorable exchange rate environment that is getting long in the tooth.  Microsoft needs a way to succeed in a huge market.  Arguably, there isn’t a bigger market today in the Tech business than advertising.

Microsoft could just decide to ramp up investments in the online business.  Certainly there are some good mid-managers scattered around the company (Erynn Petersen, Jamey Tisdale, Brian Goldfarb, Chris Bernard, and others come to mind) who understand the market and know what to do to capture opportunity in internet marketing and interactive businesses.  But Microsoft can’t fund everything and maintain margins at the same time.  Add a dollar to online, and you are taking a dollar away from another established business with an opportunity to increase share.

I have no idea what will happen from here.  On the surface, Yahoo is a dog that will probably die in 8-10 years if left to its own devices.  But this is and never has been about Yahoo.  It’s about how Microsoft will secure the next phase of its growth.  Yahoo isn’t a great option, but neither are the alternatives.

Steve — it’s still your move.