Microsoft CEO backs Web spending, “done” with Yahoo

SOURCE:

Reuters

2008-07-24 19:40:55

Microsoft CEO backs Web spending, “done” with Yahoo

REDMOND, Washington (Reuters) –

Chief Executive Steve

Ballmer on Thursday defended Microsoft Corp’s need to make

heavy investments in its Internet businesses but said the

company was “done,” for now, with pursuing Yahoo Inc.

“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 Inc. “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.

BIG PLANS WITHOUT YAHOO

Seeking to show momentum in its existing Internet business,

Microsoft announced that it had expanded its existing pact with

Facebook, the world’s largest social networking site, to

provide Web search and search advertising in addition to its

existing deal to run graphical display ads on Facebook pages.

Satya Nadella, Microsoft’s senior vice president in its

search and advertising group, said the expanded Facebook deal

would be implemented in the next few months and “carry both our

Web results, as well as our page search advertising.”

Microsoft said the new search advertising deal will be

limited to Facebook’s U.S. pages. The pact builds on a deal in

which Microsoft invested $240 million last October in Facebook

for a 1.6 percent stake, valuing the company at $15 billion.

Ballmer said its pursuit of Yahoo reflected the importance

of Web search as the starting point for consumers to locate a

growing range of digital media and e-commerce services from

online video to shopping, which he estimated represented a $1

trillion business opportunity.

Ballmer described Yahoo, the world’s second-largest

provider of Web search and related advertising, as a quick way

for Microsoft, a distant No. 3 player, to gain scale in order

to compete more effectively with leader Google Inc.

“A lot of our discussion around Yahoo centers as much on

this issue as any other issue,” he said, adding later: “This is

a two-horse race. It is about Microsoft and Google.”

Nonetheless, Microsoft Chief Financial Officer Chris

Liddell all but ruled out a full acquisition of Yahoo.

“The chances of us buying Yahoo on a full acquisition basis

are so small that they are essentially negligible,” said

Liddell, adding that he never says never.

Microsoft walked away from a full acquisition, according to

Liddell, because it saw Yahoo as a “declining asset” and its

value continued to sink while it dragged its feet about

accepting the offer from Microsoft.

Liddell also said he is worried that by the time Yahoo

comes around to accepting Microsoft’s most recent proposal — a

bid to buy just Yahoo’s search business that Yahoo rejected

last month — Microsoft will already be so far along in a

strategy without Yahoo that it will no longer be interested.

Shares of Microsoft fell 3.75 percent to close at $25.44 on

Thursday following the departure of Johnson, announced late on

Wednesday.

(Additional reporting by Eric Auchard in San Francisco;

Editing by Phil Berlowitz and Braden Reddall, Gary Hill)

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