Report: Microsoft May Exit Online Ad Business

If Microsoft doesn't purchase all of Yahoo or at least their search business by 2010, they'll be getting out of the online ad business, according to analysts at Cowen and Company.

In a research note released today, analysts Kevin Kopelman and Jim Friedland have concluded that Microsoft's respectable third quarter earnings are still troubling for Microsoft's online ad business:

None of Microsoft's online initiatives have gained traction and we do not believe the company's current strategy will result in a change in the status quo. We estimate that the OSB unit will have a 7-8 percent drag on Microsoft's earnings in FY2009. As the economy slows, we believe pressure will increase on the company
to focus on profitable initiatives.

Microsoft's online services business (OSB) grew 15 percent in the third quarter (compared to Google's 31 percent growth and Yahoo's 9 percent), but the company's OSB is operating with a loss of $480 million on revenues of $770 million.

After Microsoft's offer to purchase Yahoo this summer was rejected, Microsoft has stated that it is no longer interested in the portal. However, as Yahoo's search partnership with Google languishes in a Justice Department antitrust investigation, Yahoo's prospects are looking more grim. If the deal fails, Yahoo may be available at a price far lower than Microsoft originally offered. And Friedland and Kopelman seem to think that Microsoft's online advertising hopes are contingent on some sort of Yahoo partnership.

As they see it, Microsoft has three options over the next 18 months: they can purchase a 100 percent stake in Yahoo, acquire Yahoo's search business, or exit the online ad business. Even the company's exit is tied up in Yahoo. They see a possbile exchange of MSN/Live.com for a minority stake in Yahoo.