turnbulled

I can’t get into the SplashCast blog admin right now, so I’m posting my initial thoughts (speculation) regarding Microsoft walking away from Yahoo!.

This is a huge story. It’s the digital media story of the year.

Oh, and it’s not boring as charming French blogger Loic Lemeur asserts (with a few under his belt).

I’ve been hearing all kinds of convoluted theories about what is happening. My guess is that the simple answer is probably correct: Microsoft isn’t done. They realize that they represent the best option for Yahoo! and can wait them out.

As expected, YHOO is down big Monday morning. This is what Microsoft wants to see. It’s a big stock market “I told you so.” Microsoft let go of the rope and Yahoo! fell.

So my guess? Microsoft will jump right back in three to four months down the road and pick up a Jerry Yang-less Yahoo! up for a much lower price. That’s it.

That’s what I think.

It’s a lot more fun to speculate about other scenarios, however.

Microsoft needs traffic and advertisers. They are proven experts in software development. They haven’t been able to create the other two big pieces: massive traffic and advertiser relationships. There are some interesting non-Yahoo! traffic options for Microsoft.

The most obvious ones are the mega social networks: Facebook and MySpace (less interesting would be AOL/Bebo).

Yahoo! is last year’s hot restaurant. MySpace and Facebook represent the future (as far as anyone in this business can see the future). Traffic and engagement metrics point to the social networks as the place for advertisers to be.

Of course, it’s not as simple as saying Microsoft should pick up Facebook or MySpace. They would have to do some serious wrestling to pull the MySpace (or AOL/Bebo) away from Google. Perhaps it is possible, but it seems highly unlikely.

Facebook might be Microsoft’s next best option. Microsoft already owns a chunk of equity and owns the display advertising real estate on Facebook. So, why not play this out sooner versus later and purchase Facebook now?

There are several reasons why Microsoft might rather wait. First of all, the valuation will be crazy. However, that’s likely not enough to scare off Microsoft (especially if Facebook is viewed as one of the last great traffic sources).

Secondly, advertisers have not yet figured out a way to effectively generate revenue in the social networks. CPMs are very low. Banner ads have performed horribly there. That being said, there are other ways to generate advertising revenue (e.g., sponsored applications). This feels like a challenge that Microsoft might well be up for.

All that being said, my guess is that Microsoft will be standing by ready to scoop Yahoo! up off the playground asphalt on the cheap. If, however, Ballmer has seriously walked away from Yahoo! I’m guessing that Microsoft makes a play to acquire Facebook. If so, things will get even more interesting in terms of the ongoing effort to effectively generate revenue in the social networks.

Interesting times in digital media. Well, when hasn’t it been interesting in this business?