By Crayton Harrison and Amy Thomson

May 5, Bloomberg

Microsoft Corp.'s decision to drop its pursuit of Yahoo! Inc. increases the pressure on Chief Executive Officer Steve Ballmer to make his money-losing Internet business succeed against Google Inc.

Ballmer's bid for Yahoo, the most-visited Web site, signaled that Microsoft was making little progress against Google in Internet search advertising, said Charles Di Bona, a Sanford C. Bernstein analyst. Ballmer withdrew his bid over the weekend after Yahoo refused a sweetened offer of almost $50 billion in stock, leaving investors asking what his online strategy will be.

``They've got to come out sooner rather than later with a pretty well articulated vision,'' said New York-based Di Bona.

The danger for Microsoft is that Google, owner of the most popular Web search engine and winner of the most online advertising dollars, will expand its dominance while Ballmer plans a new course. Google gained 10 percentage points of market share in Internet queries since June, providing 59.8 percent of the searches done in March, according to researcher ComScore Inc. in Reston, Virginia.

Ballmer and Kevin Johnson, president of Microsoft's Internet unit, met two days ago in Seattle with Yahoo co-founders Jerry Yang and David Filo, two people familiar with the negotiations said. Redmond, Washington-based Microsoft, the largest software maker, offered to raise its $44.6 billion bid by about $5 billion, to $33 a share. Yang and Filo refused to accept less than $37 a share, the people said.

Microsoft was probably right to walk away because its return from the purchase would have been too small if it had paid more than $35, Di Bona said.

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photo: The Microsoft Corp., Google Inc. and Yahoo! Inc. Web sites are displayed for a photograph in Hong Kong on Feb. 5, 2008. Photographer: Nelson Ching/Bloomberg News