So Steve Ballmer finally said “no!”
It’s not the end of the story, to borrow a line from “The Matrix,” but just the beginning for both Microsoft and Yahoo. In the coming weeks, both companies will have to regroup and rethink their strategies for the long term. And you could argue that by deciding Saturday not to raise his final $33-a-share or $47.5 billion offer for Yahoo or pursue a hostile takeover, Mr. Ballmer has already reset his company’s path to the future.

Had he acquired Yahoo, Microsoft would have gained the 1.36 billion Internet searches conducted via Yahoo, a distant second to Google’s 4.5 billion, according to figures for February from Nielsen Online.  Add 860 million MSN searches, and a Microsoft-Yahoo deal would have cornered almost 29 percent of Internet searches vs. 58.7 percent for Google. Presumably, Yahoo’s other popular offerings, including its financial data services, would have given Microsoft some of the credibility it lacks as an Internet player and a vast increase in its online audience. Now Microsoft will have to either go it alone – or find another target to fill the considerable gaps in its armada.

Yahoo shareholders are likely to feel the pain of Mr. Ballmer’s decision in the coming days as its share price drops from the levels that anticipated a deal with Microsoft. For Yahoo CEO Jerry Yang and his management team, the only apparent new strategy is cooperation with Google, which dominates Internet advertising. Yahoo, which has struggled to earn as much revenue as Google from serving Internet ads, recently tested having Google handle some of the advertising. The results were apparently significant enough that the companies have extended the trial. But as Mr. Ballmer pointed out a letter to Mr. Yang Saturday, “..it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. “

However, cooperation with Google may be limited by anti-trust concerns. A combination of Google and Yahoo searches would bring more than 80 percent of Internet searches under the control of one company. The U.S. Justice department has already queried both companies on their cooperation.

Then there’s AOL, for which Time-Warner is trying to find a new home. Yahoo talked to the media giant but discussions apparently did not get very far with Microsoft looming in the background.  If Yahoo’s shares drop, the two companies may find a deal that would combine Yahoo and AOL. However, AOL has suffered a sharp drop in online ads and is struggling to make the transition from a walled garden to an open Internet player.  Some experts think integrating the two companies would be even more difficult than a Microsoft-Yahoo combination.

There are probably a lot of people at Microsoft who are happy the Yahoo deal did not go through. But the company has not made much progress in denting Google's dominance of mindshare about the Web.  Maybe now the Microsoft will redouble its efforts to break away from its reflexive proprietary vision to one that embraces the openness and agnosticism of the Web. For a company that is the No. 1 seller of software in the world, that may be the most difficult deal of all to complete.