"We're in an investment mode, particularly as it relates to search," Microsoft
Ballmer didn't necessarily mean his company is on the prowl for another aQuantive. The company already spent $6 billion on that deal earlier this year, and it's still in the digestive process.
No, Ballmer's reference to "investment" is strictly organic. The company has been posting quarterly operating losses at its online arm, and the losses will continue as long as the company spends more than it's taking in at MSN.
That's a problem. Mr. Softy continues to throw money at a subsidiary that's perpetually losing ground to Google
In short, Mr. Softy is Gilligan, trying to build a boat out of a book of matches. It won't work. It's brittle. It's flammable. Microsoft is stranded on some uncharted island, and it's going to need a rescue party if it wants to get out of its rut.
Big trouble for little buddy
The software giant is doing a lot of cool things, especially with Microsoft Live, but consumers aren't noticing. And the company can't just wait for quality to win out. That takes too long, and it gives the competition time to build a better mousetrap.
Microsoft needs to get aggressive. Buying interactive-marketing specialist aQuantive was clearly aggressive, but Mr. Softy needs to secure even more virtual real estate. With its thinner list of names and a current assortment of poorly monetized sites, it can't compete with Google in paid search. It can't be content to settle for a bronze medal and wonder what coulda-woulda-shoulda been, had it put its greenbacks to acquisitive use.
Granted, search engines have a history of being lousy investors. They sell low. They buy high. But we have to make an exception here. If Microsoft is going to keep throwing money at its own stagnant properties, the dirt becomes the problem, not the fertilizer. Even if it has to overpay on an acquisition -- and it did with aQuantive -- at least it's an investment in something immediately incremental.
Here are the names that should be near the top of Microsoft's shopping list:
(NASDAQ:IACI). Now that Barry Diller has decided to split his kingdom into five standalone entities, the path is clear for Microsoft, the bronze medalist in search, to acquire the fourth-place player in IAC's Ask.com. It won't have to worry about dealing with IAC appendages such as Home Shopping Network or Ticketmaster, which will be spun off. Instead, it can scoop up an innovative search-engine star in Ask.com, as well as boosting its presence in subscription services (with Match.com) and local search content (with Citysearch).
(NASDAQ:CNET). If Ballmer truly wants to invest in search, why not invest in Search.com? CNET's poorly exploited yet perfectly named search engine offers obvious growth opportunities for Microsoft. However, it's the rest of CNET's portfolio of content-blessed properties that would fortify MSN. Whether it wanted to appeal to techies (ZDNet, Tech Republic, News.com, Download.com), Xbox gamers (GameSpot, GameFAQs.com), or lifestyle junkies (TV.com, Chow, MP3.com), Microsoft could have a field day sorting through CNET's Russian nesting dolls of properties.
(NASDAQ:UNTD). Juno and NetZero wouldn't be the prize here. The real gem is Classmates Media. Microsoft can wait for the Classmates IPO as a way to buy into Classmates.com and MyPoints.com directly, without the access hurdles, but its recent investment in Facebook may price the Classmates offering into the stratosphere as a hot social-networking IPO. It could always team up with an access provider such as EarthLink (NASDAQ:ELNK)to carve out the company accordingly. The irony is that Classmates.com was early to the campus-connecting game, but it played its hand poorly. It spent too much time pitching premium subscription products to nostalgic college alums instead of building a social hotbed such as Facebook or News Corp.'s MySpace. Classmates.com has a golden opportunity to reposition itself, but it also has a narrow window in which to get things right. Yes, Microsoft already has Facebook locked up as an ad partner, but Google is in cahoots with the larger MySpace. Mr. Softy would surely love it if advertisers looking to reach the lucrative college-graduate market would have to go through it to get to Classmates.
Time to make a deal
Obviously, the quickest, though certainly priciest, solution would be for Microsoft to absorb Yahoo!
Unfortunately, even Microsoft's deep well of billions isn't enough to make this happen as an all-cash deal. Stock would have to be the legal tender of choice. That's fine, of course. Despite Microsoft's online stumbles, its shares hit a fresh six-year high this month. With Yahoo! still in a financially moribund state, it may not balk at a deal to reward patient shareholders. As long as Google continues to grow more quickly than either company, the distance widens with every passing quarter that Yahoo! and Microsoft don't hook up.
You say you're in investment mode, Ballmer? Prove it.
CNET has been singled out to Rule Breakers readers. Yahoo! has been recommended to Stock Advisor subscribers. Microsoft is an Inside Value selection. Why are you missing out on these great stock picks? Get yourself a free 30-day pass to any or all of these newsletter services.
Longtime Fool contributor Rick Munarriz isn't on Microsoft's buy list. That's a pity, because he's a cheap date. He does not own shares in any of the companies in this story. He 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.