Microsoft's Ballmer on the Yahoo Bid

The software giant's CEO explains why he's trying to acquire the Internet portal. (Hint: It has a lot to do with Google.)
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In recent months, Microsoft (MSFT) executives dismissed the prospect of a tieup with Yahoo (YHOO) even as rumors swirled that a deal was in the works. Microsoft, they explained, was strong enough on its own to compete with Google (GOOG).

As it happens, Microsoft CEO Steven Ballmer had been talking with executives at Yahoo on and off since late 2006 about working together, possibly through a merger. After more than a year of spurned overtures, Redmond (Wash.)-based Microsoft went public on Feb. 1 with an unsolicited $44.6 billion offer. Sunnyvale (Calif.)-based Yahoo said in a statement it would "evaluate this proposal carefully and promptly in the context of Yahoo's strategic plans and pursue the best course of action to maximize long-term value for shareholders."

Ballmer spoke briefly with BusinessWeek Seattle bureau chief Jay Greene after the proposal was announced, saying that Google's increasing dominance of online advertising makes that competition ever more challenging.

Google's Virtuous Cycle

"We have been making good progress" in the online advertising arena, Ballmer says. "We're in this game and we're going to be in this game. But the market leader is getting stronger."

Like Microsoft in the early days of the operating system software wars, Google continues to consolidate its position through what Microsofties like to call a virtuous cycle. Internet companies sell online ads through auctions, and Google has become more effective at selling and placing ads by amassing a larger network of would-be bidders for those ads than Microsoft or Yahoo. That in turn creates a bigger market for advertisers, who flock first to Google. The company's lead has only widened, leaving Microsoft and Yahoo unable to catch up.

That's why scale is so important, Ballmer says. A combined Microsoft and Yahoo would "bring together critical mass" and create an ad network that could come close to rivaling Google, Ballmer says.

Microsoft has a lot of thinking to do as to how it will integrate Yahoo, but Ballmer says consumers would continue to have access to Yahoo tools and features, even as behind-the-scenes functions, such as search, get combined. "There's no doubt that Yahoo, the brand, lives," Ballmer says.

Awaiting Yang's Reply

Ballmer was less specific about what other parts of the Yahoo operations would continue. Clearly, Microsoft likes the idea of increasing the capacity of the search network. "The ability to do more, that's fantastic," Ballmer says.

Microsoft will get added computing and storage heft from Yahoo's server farms around the globe to dish up all that content to Web surfers, Ballmer says. He was vague, though, on where the company would eliminate the "redundant infrastructure" outlined in a Jan. 31 merger letter to Yahoo CEO Jerry Yang.

Ballmer called Yang last night to notify him of the offer. Ballmer gave no hint that the conversation was acrimonious. "He let me have a chance to have a few words," Ballmer says. Now, Ballmer will await Yang's reply.

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