The three-way "negotiations" between Carl Icahn, the Yahoo board, and Microsoft turned up another non-starter offer for MSFT to cherry-pick Yahoo’s search assets, which in turn led to much finger-pointing, and general acrimony.

The result is that Icahn may now be out of the picture, and that Yahoo will survive through its August 1 shareholder meeting. Unless Microsoft comes back with a last minute complete buy-out offer at a guaranteed, cash-equivalent price that is ($29 per share would seem like the absolute minimum in this regard).

But it all seems increasingly unlikely, leaving Microsoft without a strategy, and Yahoo desperate to get past the distraction of the entire episode, and its operation back on track.

Jerry Yang is apparently begging his troops to keep working (for the second time in two months), and as I previously pointed out, for good reason. And even though we don’t hear similar exhortations form inside the Microsoft bunker, there is little doubt that Microsoft is not similarly affected:

During the entire first half of 2008, the only news out of Redmond other than the Micro-hoo botched deal attempts, has been the announcement of the "Live Search Cashback" (LSCB) attempt to sort of buy search query share using a rebate gimmick (that had failed to work before). That MSFT and some commentators touted this as a "game changer" proves the depth of their dilusion.

I have been working on a detailed post for why LSCB was such a bad idea in many (technical) ways, but the end-result is much easier to ascertain through some simple tests: I occasionally have been checking LSCB price quotes against Google search results for identical items, and the FREE(!) product listings at the top of Google Universal Search beat the LSCB prices with the "discount" (that MSFT is kind enough to hold in escrow for you for up to 2 months) MOST OF THE TIME!

I expect ComScores due out this week to tell the tale that Live Search Cashback has caused nary a blip on the search share radar screen. Even Microsoft seems to not be talking about it anymore…

During the same time frame, Google has had major announcements regarding their OpenSocial, GoogleGears, Google App Engine, and Google Android (Google’s mobile phone) software kits, all the while honing their core search and search ad serve in the background. Even Yahoo recently announced a relatively substantial opening up of their search toolkit to developers for third-party applications.

Back to Yahoo’s Serious Issues

In recent weeks, high level departures and reorg moves by the Yahoo board’s Sue Decker, have highlighted again how deep the rot of bloated hierarchies and excessive middle management has gone inside Yahoo. I had previously reported some signs of the same thing on this blog.

The question is if this can be turned around in any meaningful way. And by the way, there is a huge question as to whether MSFT/Steve Ballmer would be doing any better, they are not exactly masters of nimbleness and have ZERO credibility when it comes to making a profit on the Internet.

Yes, Yahoo still has reach and scale, but what is really needed is a clear vision and marching-order on what Yahoo is supposed to stand for going forward. Their lack of focus has been their achilles heel the entire time.

While Google has built "Google = Search" brand in a (mostly) disciplined way, which is one of the key reasons for why they have been able to monetize better on search (people come to their site with a relatively defined mindset), Yahoo = what?

Yahoo’s portal strategy has been an albatross around their neck almost from its beginning.

Add to this the slowness in response due to the excessive hierarchies, and that is all you need to know as to why they haven’t been able to compete with Google. It’s a simple focus and positioning issue.

(The argument repeated again in a comment on Silicon Alley Insider by supposedly a Yahoo employee that Google monetizes better vs. Panama due to larger query share is simply false: It is about the average user mindset/context gap. Remember that Yahoo once had a lot larger share of search. So that’s not it.)

The only thing that Yahoo can do now is to decide how they want to position themselves, ideally in a new category instead of as an also-ran, and then stick with it and execute. But that decision must come first.

I for one see a lot of potential in making Yahoo into one gigantic open social network from the inside out, and among other things leveraging their user base to create a supplementary user-generated/rated search a la Mahalo and Digg.

Plus open up all of the spickets to leverage open source development assistance. If they still want to be in search and search ads, outflank Google by opening up the kimono to advertisers and become the "transparent search ad platform" vs. Google who like to keep things close to their vest.

At this point, they need to create an undeniable, compelling reason to get the advertisers back and hence the monetization up. Also, if they can begin to create context-targeted "social ads" a la Facebook (only better) inside of a newly created "Yahoo as Social Network" (see above), they could leap-frog Google search because Google still knows very little of real substance about the individual user at this point.

It’s all about proof of concept right now, and the more radical the better, as only that can have a chance to generate mindshare and get people to start using the new services. Everything must be on the table. I hope Jerry and Co. are seeing this on the inside.