Microsoft (NASDAQ:MSFT) had the right idea when it proposed to Yahoo! (NASDAQ:YHOO) last year. It just went down on bended knee for the wrong CEO.

On CNBC's Squawk Box yesterday, Carol Bartz conceded that she would have probably taken Microsoft's offer, if she had been at the helm.

"Sure," she said. "You think I'm stupid?"

She went on to compare Microsoft's offer in the low $30s to today's trading at less than half of the software giant's original buyout proposal.

However, she also admitted that things were different after the collapse of Lehman Brothers.

Bartz stepped in as CEO this year, so she certainly can't be held accountable for last year's boardroom recalcitrance. However, she did spearhead this summer's search deal with Microsoft, which virtually kills off any reason for Mr. Softy to acquire Yahoo!

Bartz tried to justify the paid-search arrangement. Yahoo! will be collecting 80% of the revenue, with the flexibility to dramatically cut expenses now that Microsoft is doing all of the heavy lifting. This agreement will also let Yahoo! focus on display advertising. This is "the emotional side" of online advertising, according to Bartz. Unfortunately, it's also less lucrative.

There's a reason paid-search leaders Google (NASDAQ:GOOG) and Baidu (NASDAQ:BIDU) are growing faster than their smaller rivals. Contextually relevant, keyword-based text ads are the real moneymakers in interactive marketing.

Yahoo! may be able to populate its pages with engaging eye-candy spots, but there's a reason why Yahoo!, Time Warner's (NYSE:TWX) AOL, and action-based specialist ValueClick (NASDAQ:VCLK) are struggling these days.

There was a fork in the road, and Yahoo! went the wrong way.

Is it too late to come back? Yahoo! seems committed to the path it has chosen.

"The next big thing is that people need a little organization," Bartz said.

From her perspective, folks want to wake up to relevant news, their home team's sport scores, overnight tweets, and hyperlocal data. That's what the My Yahoo! initiative has been about for ages, but just 15% of Yahoo! visitors, according to Bartz, have gone through the trouble of updating their profiles to make them relevant.

To appease the lazier 85% of us, Yahoo! has been updating its home page to dynamically serve up this information.

Who knows? Maybe this winding path will meet up with Google's high-margin road in a couple of years. The major risk is that stickier sites -- such as Facebook and Twitter -- can lace up their sneakers and race down that same road even faster.

The road is long. And lonely. Let's hope that Microsoft didn't pawn the engagement ring.

Tapping Yahoo!'s snooze bar:

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Longtime Fool contributor Rick Munarriz wonders whether it's time for Yahoo! to shed the exclamation point. Howns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.