Yahoo debacle casting a long shadow over internet strategy

If Microsoft has a plan B for internet search, it will take some time to materialise and cost agreat deal of cash.

That was the impression left yesterday by Steve Ballmer, chief executive officer, as he sought to convince an increasingly doubtful Wall Street that the Yahoo debacle would not put paid to Microsoft's online aspirations.

The uncertainties were intensified by the surprise departure late on Wednesday of an executive whose star had risen rapidly in recent years. Kevin Johnson, who had masterminded Microsoft's Yahoo bid and also been responsible for its core Windows PC operating system business, was named chief executive officer of data networking company Juniper Networks.

Mr Johnson's sudden exit, and Microsoft's decision to reverse course and break apart the Windows and online divisions it had united under his leadership three years ago, was seen as an immediate response to its troubled internet strategy.

It also appeared to reflect the mixed reception for the Windows Vista operating system, analysts said. While Windows revenues in the most recent quarter beat most expectations, bad publicity about early technical glitches in Vista have led to slower adoption of the software by big corporate users than Microsoft had hoped.

A former head of Microsoft's sales organisation, Mr Johnson had been seen as a natural head of the Windows business. One person close to Microsoft suggested that the size of the task, at the same time that he had to sort out Microsoft's struggling online business, had proved too much for one executive.

Some observers questioned whether Mr Johnson's departure would now lead to a rethink in Microsoft's online strategy. "The refocus should be back on its core business," said Venkat Venkatraman, head of the information systems

department at Boston University's school of management.

However, Mr Ballmer left no doubt that he was still pursuing an expansive long-term vision to make Microsoft one of two dominant internet companies, alongside Google. "Everything in the world that can be moved and delivered over IP networks will be," he declared. Catching a large share of this internet market could eventually add 50 per cent or more to Microsoft's stock market value, he said.

The potential cost of those ambitions has weighed heavily on its stock since last week's revelation that Microsoft's operating costs over the next 12 months would be $500m higher than analysts had expected.

But Mr Ballmer said the $1.2bn loss on Microsoft's online business last year amounted to only 5 per cent of operating income and was a "relatively smart and efficient" investment given the long-term potential. He also sought to play down the significance of Microsoft's failure to secure a Yahoo deal. "There was always going to be huge integration overhead in buying Yahoo or doing a search deal."

Yet he could do little to answer one of the most pressing questions raised by the Yahoo failure: how, even given its massive investment, could Microsoft start to make greater inroads into Google's market.

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