Today, there are several major clouds: Google, Yahoo, Microsoft, Amazon and smaller players IBM and Sun. Can there be more? Sure, but it would require a business model that could not only pay for it, but could rip it out every few years and modernize it. Google's $20 billion Web advertising business gives it the cash flow to do so. Advantage Google.

Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game

There, search results can be calculated, companies' payrolls processed, even the complex graphics for video games can be drawn. But it's not cheap. These clouds are multibillion-dollar investments. Google spent $842 million in the last three months on servers, data centers and fiber optics.

- The Cloud. The desktop computer isn't going away. But as bandwidth speeds increase, more and more computing can be done in the network of computers sitting in data centers – aka the "cloud."

With the Microsoft/Yahoo deal breakdown, everyone assumes Google walks away with the prize. Not so fast. This contest is just starting. For Microsoft or Google or anyone else to win, they need four key elements of an end-to-end strategy:

Can't Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo's 20% Web search market share to Microsoft's 10% meant that it could compete against Google's 60% share. Technology changes too fast for that to make sense except on paper. Programs run anywhere these days – on your desktop computer, on servers in data centers, on your iPod, cellphone, GPS, video game console, digital camera and on and on. It's not just about beating Google at search, it's about tying all these devices together in a new end-to-end computing framework.

Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It's never good to overpay. But the software giant – whose stock has flatlined for eight years – was onto the right strategy in looking to the Web for growth.

- The Edge. The cloud is nothing without devices, browsers and users to feed it. Book buyers are basically paying for Amazon's data centers. Yahoo is a favorite for finance and sports enthusiasts, who pay for its data centers. Google worked its way into the toolbars of Firefox, and even Microsoft's browser.

And Microsoft? It was stripped of its ability to control Windows desktop real estate during the late '90s Netscape feud. Accused of using its overwhelmingly popular Windows operating system to unfairly dominate other new markets, Microsoft settled the dispute with the Justice Department in 2001.

Now Microsoft scrambles for other advantages. One lies in smart mobile devices, which is the fastest-growing location to launch search requests. Microsoft software runs on about 20% of smart phones in the U.S.

Don't underestimate the value of Microsoft's other market stronghold, its X-Box video game platform. Now you know why Google is scrambling to plant a flag in the cellphone business with its Android technology and bids for wireless spectrum. So far, advantage Microsoft.

- Speed. Once you build the cloud, it's all about network operations. Whoever can deliver search results faster, wins. Users only realize this subconsciously, but it's true: Google's dominant share is as much about speed as it is for relevant results. Compare it to Microsoft or Yahoo and you'll see. Google built data centers next to waterfalls so electricity could be cheap enough to help it win the speed war.

New cloud applications appear every day – backing up files, managing your money, editing photos, running the back end of multiplayer games like World of Warcraft. Now corporate America is evaluating moving its accounting, scheduling, order management and the like into the cloud, and speed will be a top priority. Advantage Google.

- Platform. Yahoo's mistake was relying on expensive workers to update Web pages and sell ads, and especially to run Yahoo Finance, Sports, HotJobs and Travel. Google hates using people for these tasks. The company may love programmers and probably customers as well, but it tries to put absolutely no one in between them. Google's genius was to automate all its Web page creation and to have a market set prices for ads.

But even though Google has more than 10,000 employees, the company doesn't have a lock on brain power – especially since its stock is not climbing as fast as it once did, and with young coders setting their eyes on the next big startup.

Having a fast cloud is nothing if you keep it closed. The trick is to open it up as a platform for every new business idea to run on, charging appropriate fees as necessary.

Microsoft knows this. I sat through a keynote speech by Bill Gates maybe 15 years ago. Asked why Microsoft makes all the money in the software business, he snapped: We don't make all the money. Actually, we only make money because we are a platform for others to use our software to make money themselves.

Only by opening up system internals to thousands of hungry developers can anyone truly create an operating system in the cloud. Google has made open announcements but is still quite closed. Advantage Microsoft.

So with the failure of the Yahoo bid, where does that leave Microsoft? The answer is found in Microsoft's mantra: embrace, extend and innovate. Made famous in a 1994 Microsoft executive memo, this mantra has worked again and again: Windows dominated Apple for decades, the Excel spreadsheet bypassed Lotus 1-2-3, and the Internet Explorer browser destroyed Netscape.

Of course, Microsoft could come back and bid again for Yahoo at $25. But there is a go-it-alone strategy: Embrace the Web search and advertising business. Maybe even do what Craigslist did to newspaper want ads, devaluing search advertising by offering the same thing for free, or really cheap.

The trick is to then extend and innovate. Run code that figures out what users are looking for, not just on servers, but on X-Boxes, Zune music devices and even Apple iPhones. Some of the new markets aren't even twinkles in developers' eyes.

At the moment, neither Google nor Microsoft, or anyone else, has nailed down cloud, edge, speed and platform. All the loosely coupled electronic devices in our pockets need to work together seamlessly with Facebook applications in the cloud. Who will do it? Unclear.

The continuing battle between Microsoft and Google will mean fierce competition – adding features, building data centers, cutting deals and spending money on speed and customer convenience. That's the way to move technology forward. It's great to see Microsoft with some fight left in it. Not only hasn't the Internet yet matured, it's becoming an ever-more high stakes game.

Mr. Kessler, a former hedge fund manager, is the author of "How We Got Here" (Collins, 2005).

SJ