Microsoft CEO backs Web spending, “done” with Yahoo

“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% 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% to 10% 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% 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.

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 US pages. The pact builds on a deal in which Microsoft invested $240 million last October in Facebook for a 1.6% 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. (Reuters)