UPDATE 1-Microsoft CEO says done talking to Yahoo, for now

(Adds CEO comments on Yahoo, byline)

REDMOND, Wash., July 24 (Reuters) - Chief Executive Steve Ballmer on Thursday defended Microsoft Corp's MSFT.O need to make heavy investments in its Internet businesses but said the company was "done," for now, with pursuing Yahoo Inc YHOO.O.

“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. “Yahoo was always a tactic not a strategy,” he said, repeating a frequent line.

The Microsoft leader was speaking at the opening of its annual analyst meeting with Wall Street analysts, an all-day affair at its headquarters in Redmond, Washington.

“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.”

But Ballmer suggested he would never say never to reviving talks: “Does that mean nobody will ever talk to anybody again? I suspect the answer is also no,” he said.

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 GOOG.O.

“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.”

The Yahoo-Microsoft combination made sense because of cost savings to be gained from merging research and development and data center investment, Ballmer said, but added that the deal fell apart over price and possible regulatory approval delays.

“At the wrong price and if it had to stretch out over two administrations of review ... it was not a good tactic,” he said.

Microsoft believed it had to seal a Yahoo deal by early May in order to win approval for it from U.S. regulators before a new administration takes over in Washington. Yahoo rejected a $47.5 billion bid by Microsoft at the time.

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.


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.”

Speaking of its broader strategy beyond Yahoo, Ballmer said its online businesses could eventually account for most of the economic value created by the world’s largest software maker.

Microsoft has said it planned an additional $500 million in investment for its online business even as it continues to chalk up losses. Ballmer said given the opportunity, the losses represent an investment for a potential windfall.

Ballmer 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 JNPR.O.

“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.

Microsoft shares fell 3.4 percent to $25.54 following the departure of Johnson, announced late on Wednesday. (Additional reporting by Eric Auchard in San Francisco; Editing by Phil Berlowitz and Braden Reddall)