As Microsoft ends its Yahoo bid, how will the internet's future be

The big question

Why are we asking this now?

Because the stage had been set for a new act in the history of the internet, as some of the world's biggest companies readied themselves to do battle over how we navigate the web. In one corner was the all-powerful Google, pockets stuffed full of cash, looking good for online domination. And in the other corner was meant to be a celebrated new tag team, as Microsoft linked up with internet firm Yahoo in an attempt to provide a credible challenger to Google. A great fight was in prospect, but the bout will no longer take place after Microsoft surprised the business world by walking away from its proposed $46.5bn takeover of Yahoo.

The collapse of the deal has not only had a disastrous effect on Yahoo's share price and cast doubt over Microsoft's long-term tactics for wresting control of internet use away from Google, but has also prompted wider questions about the future of the internet business sector. Though one big deal may have fallen through, most analysts are still predicting a significant shake-up of the businesses that dominate the web.

Why did Microsoft want to buy Yahoo?

On the face of it, the deal made a lot of sense to both sides. Yahoo shareholders would make a tidy profit, while Microsoft would seize ownership of the world's second most popular search engine, tripling its share of US internet searches overnight. Overnight, it would become better equipped to survive in the monumental struggle for internet prominence. And it wasn't just a popular search engine that Microsoft would have been getting its hands on. Yahoo also owns several smaller internet sites that have taken advantage of the new ways in which people are using the internet, including Flickr.com, a site used for sharing photographs, and internet book-marking site del.icio.us.

Why did it break down?

Frustration got the better of Microsoft chief executive Steve Ballmer after Yahoo board members turned down an improved bid of $33 a share. The deal had already stalled for several months, with Microsoft even threatening to remove board members if an earlier deal of $31 a share was not approved. Yahoo chief executive Jerry Yang was not keen on the Microsoft takeover from the start and frantically tried to come up with rival suitors for his firm.

So is the deal totally dead?

Don't be too sure. Many Yahoo shareholders are angry and demanding an explanation of why the takeover collapsed, and the company is now facing a series of law suits over its handling of the deal. It is not impossible that it could be pressured into resuming talks with Microsoft, or that the two patch things up in the future and have another crack at closing the deal. Though on the face of it the two disagreed to the tune of $4 a share, in reality the gap was probably much smaller, with major shareholders suggesting that a very slight improvement on the $33 a share offer would suffice.

Who are the winners and losers?

The obvious loser is Yahoo, with its share price plummeting at a rate of knots after the deal fell through. Some have urged it to buy back a chunk of its stock in order to inspire some confidence in its ailing share price. The real winner is Google. Not only has the search engine firm seen the prospect of a credible rival disappear, but it may yet find itself pairing up with Yahoo. Its chief executive Eric Schmidt has been in talks with Yahoo about a possible deal over internet advertising. But no doubt regulators would have a thing or two to say about the number one and two internet search engines joining forces. In his letter to Yahoo's chief executive, Microsoft's Steve Ballmer said such a move would "consolidate market share with the already-dominant paid search provider in a manner that would reduce competition". In short, Google's online victory would be all but complete.

What does it say about the future?

Perhaps the most significant aspect of the deal and the huge fallout over its collapse is what it implies about how both companies viewed their online prospects. For Microsoft, it suggested its attempts to boost the popularity of its search engine facility have failed. Its share of searches in the US has actually fallen from 16 per cent to 10 per cent over the past three years. Any attempts to foist its own search engine facility on to users via the dominance of its operating systems (the various incarnations of Windows run around 90 per cent of the world's computers) have long since been scuppered by EU regulators. Bundling its software with its operating system was deemed anti-competitive by Brussels, and earned the firm a hefty fine. Its pursuit of Yahoo looked like an admission that it couldn't battle Google all on its own. As for Yahoo, it too seems to have thrown in the towel in the fight to overhaul Google single-handedly - as the saga with Microsoft or a possible deal with Google illustrate.

Does it really matter if Google dominates?

The reason internet users flocked to Google in the first place was because its search engine was extremely easy to use and delivered accurate results extremely quickly, so the average person using the internet may wonder why domination by Google would be such a bad thing. After all, around four in every five internet searches in the UK are performed on Google.