Nightmare on Microsoft Street

Imagine this:

Google (GOOG) starts buying up a series of promising and innovative Web 2.0 companies that Microsoft (MSFT) is either partnered with or clearly is or should be interested in.

It starts with Digg, moves onto, say, Spot Runner and others (Meebo, FriendFeed, iLike and even Slide?), focused especially in the online ad, messaging, online apps and mobile spaces.

And, just to stir up the pot, why not take a gander at some bigger Internet fish? Facebook, for example. Or even eBay (EBAY), which is looking more and more like acquisition bait to me.

It could happen. Some of it will. And sooner rather than later, I would guess.

As Microsoft contemplates its next move in the Internet space after its failed bid for Yahoo (YHOO)–in order to realize its stated goals of being a big player in the ad and search space–it feels to me like it is moving with a Yahoo-level of lugubriousness.

Making some unimpressive announcements (Cash back for search? Now there’s a non-game changer), playing coy with regard to Carl Icahn’s proxy fight against Yahoo and noodling around with plots to buy part of Yahoo, Microsoft has essentially gone radio silent.

And while many smart minds think Yahoo is Microsoft’s only true path to serious competition with Google and should just cut to the chase and make another bid, it seems to be just lazily circling.

Maybe it is actually feverishly working on some amazing and bold renewal of its Yahoo deal behind the scenes, which would be great.

It better be doing something, since it seems as if Google has no intention of backing off in its bid to dominate further what it already dominates.

Clearly, the search giant had no problem getting Microsoft’s face in its takeover battle with Yahoo.

In fact, looking forward at the larger Internet battlefield–which will obviously be almost entirely fought between Microsoft and Google for the next few years, at least (although an unknown force will also surely emerge)–how Google has behaved with regards to Yahoo is instructive.

As Microsoft, forced to make a hostile bid this February after being rejected time and again by Yahoo in 2007, faced even more rejection from the Internet portal, it did not take long for Google to enter the fray.

Its tactics were to be a helping hand, a strong alternative and a flexible partner who could get Yahoo out of its jam by offering a deal that would, of course, help Google too by allowing it the chance to grab another tasty slice of the online search-ad pie.

And to throw salt in Microsoft’s wounds, its top execs then publicly pooh-poohed the deal as anti-competitive, specifically with regard to communications and display advertising.

This, still pending, even as Google’s own possible search-ad outsourcing deal has been quite questionable from a monopolistic point of view.

Now, since Microsoft does not feel compelled to make any kind of significant move, all eyes should be on what Google does next.

So, even if it is a small move like buying a Digg–as BoomTown has written again and again, the pair have been seriously talking with each other for months now, so watch that space–or some other prominent Web 2.0 start-up like it, such a thing would be a clear indicator of Google’s intentions going forward.

In part, that is to keep Microsoft from getting any kind of true traction in Silicon Valley, as it would have if it had managed to purchase Yahoo.

Welcome to Microsoft CEO Steve Ballmer’s nightmare.

So–as Freddy says–whatever you do, don’t fall asleep!

Please see this disclosure related to me and Google.