Microsoft CEO says they gave up on buying Yahoo

"There's nothing under discussion between the two of us," Ballmer told investors of how six months of various talks had reached an impasse earlier in July.

"We had a set of principles, we talked about them, it didn't work out," he said. "Fine, we're done. We can move on."

The message for Microsoft's annual meeting with Wall Street analysts, an all-day affair at its headquarters in Redmond, Washington, was that it had a post-Yahoo plan to turn around its online services division and a strategy to take advantage of future opportunities, even as its Internet chief departs.

"There is this huge, huge, huge new opportunity around the Internet and online and we have to embrace that opportunity and invest in that opportunity," Ballmer said.

Shares of Microsoft have fallen 8 percent over the last week since the company forecast an outlook below Wall Street estimates and revealed an additional $500 million investment into its online unit, even as it chalked up further losses.

Charles Di Bona, a software research analyst at Sanford C. Bernstein, said Ballmer's comments did not give enough details about how that additional investment will be spent and how the company arrived at that decision.

"It's spending $500 million dollars and then it says we'll tell you later how we'll spend it," said Di Bona, who has an "outperform" rating on Microsoft. "The market's concern is not about how it is running its core business. It's about decisions about larger chunks of money that people can't track."

Ballmer said Microsoft is willing to endure online division operating losses that amount to between 5 percent to 10 percent of the company's total operating income, which reached $22.5 billion in fiscal year 2008, until the search and advertising business reaches "scale."

He did not specify on how long this period of losses would last, but said the risk was worth the potential return.

Microsoft's online division has posted eight straight quarters of losses. It lost $1.23 billion in the past fiscal year, twice as much as it had lost in fiscal 2007 and about 5.5 percent of Microsoft's total operating income.

Ballmer said its online businesses could eventually account for most of the economic value created by the world's largest software maker.

The Microsoft CEO was left to describe Internet strategy after Microsoft announced one day before the analyst meeting that the head of that business, Kevin Johnson, was leaving. He will become chief executive of Juniper Networks.

"We thought it was important whoever was going to get up and talk about the big investment online was going to be here in three weeks and so you're stuck with me on this topic today," Ballmer said.