July 24, 2008 / 5:09 PM / 11 years ago

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.

Microsoft Chief Executive Officer Steve Ballmer speaks during the launch ceremony of Microsoft's new research and development centre in Herzliya near Tel Aviv May 21, 2008. Ballmer on Thursday defended the company's need to make steep investments in its Internet business in order to compete with Google Inc and said such moves could boost its value in time. REUTERS/Gil Cohen Magen

“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.”

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. Ballmer said given the opportunity, the losses represent an investment for a potential windfall.

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.”

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,” said Ballmer. “Does that mean nobody will ever talk to anybody again? I suspect the answer is also no,” 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.

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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