Dear Steve Ballmer:

Sorry about the YHOO bid falling apart; I knew you think/thought that the way to competitiveness on the web is by getting bigger. Single digit search share (and declining) just won’t cut it. So in that light, the YHOO bid was a good move. But alas, your board of directors was too stingy and gave you a short leash, preventing you from winning the bid. I’m sorry they don’t share your innate sense of competitiveness, that MSFT have to be the top dog in this game, that they are so focused on stupid things such as stock price.

Now that scale and size isn’t going to be in the playbook, you’ll need a Plan B. I know that you are a student of boxing, so let’s make this a boxing analogy. If you are in the title fight, and the other guy outweighs you by 100 lbs, what would you do? Well, if you can’t gain weight, you need to gain power and speed! What you need, Sir, is to knock out the opponent with speed and power of your punches! You don’t want to go thru the entire bout with their weigh advantage, but if you can dance around him like Ali (your hero) did to XXX, you’ll have a good shot of taking out the bigger opponent.

So how do you do that in the web search business? Well, there is no magic bullet. But you certainly would need people who aren’t trained in your traditional software business. Let’s face it, your executives may be smart, but they grew up with the Microsoft way of attributional warfare, where size and stamina matters more than speed and agility. The cliche about “MS will try and try again until they get it right” and “MS products don’t get good until the third version” is based on real business cases. To put those guys in charge of a speed-and-agility campaign, well, that just won’t do.

What you need to do is to set your web team free. Free of the baggage of the Microsoft Way, even though you breath and live it every second of the day. You need an organization that works the way the internet industry works, not by centralized planning from 3 years out and executing to the plan (read Steve Sinofsky’s blog), but by experimentation and rapid failure and learning and reacting. And you just can’t do that with your current roster. You need to attract the kind of execs that Facebook is attracting from Google.

Except that they will never join Microsoft.

Why would they? Facebook is pre-IPO with momentum. Microsoft is like owning utility stock. Certainly the stock price under your reign hasn’t proven to be profitable to any Microsoft employee or executive. (BTW, you really need to revisit that stock award program. It’s lamer than a donkey with its kneecap taken out.) You can grant a million shares to any hot shot net exec, and they still won’t take it since the stock price is so stagnant. And it’s not about it being stagnant, but that they know the web business will continue to be a small part of the MSFT stock price.

What they want, I think, is a smaller company that they can turn around with their mad skillz. A company whose stock is directly attributable to their performance, not the monopoly businesses that MSFT owns. A company that they can direct to whatever direction as the market dictates, without MS directors or executives running interference, telling them “Sorry, you can’t do that, it’ll eat into our existing business revenue.”

What you need, dear Steve, is to spin off your web and advertising properties, take it a high risk high reward situation that attracts the executives from Google and Facebook and Yahoo, give them incentives with an incredible upside. Just like what Facebook is offering to the Google execs.

Now this maybe what you had in mind with YHOO all along, but I doubt Jerry Yang is the kind of guy who can make this kind of breakthrough happen (although you have to admit that YHOO has been better at this game than you have. Sorry.) But with or without YHOO, with or without any other acquisition, you need to set the web business free.

You know what they say. If you love them set them free.