Ballmer seeks to justify Microsoft's bottomless-pit online spending

Microsoft CEO Steve Ballmer played online-services pitch man during his opening keynote at Microsoft's annual Financial Analyst Meeting (FAM), explaining why Microsoft believes it must continue to invest heavily in search and advertising to remain competitive in the coming years.

Microsoft CEO Steve Ballmer played online-services pitch man during his opening keynote at Microsoft's annual Financial Analyst Meeting (FAM), explaining why Microsoft believes it must continue to invest heavily in search and advertising to remain competitive in the coming years.

Ballmer was pinch-hitting for Kevin Johnson, the Microsoft President in charge of the company's formerly unified Platforms & Services unit. Yesterday, Microsoft announced it was splitting platforms (Windows and Windows Live) from Online Services, and Johnson had decided to leave the company, allegedly because he was not offered a CEO-level role. Johnson is not speaking at FAM today.

Ballmer told the analysts and press in attendance at FAM on July 24 that the online search and advertising world is now a "two-horse race" between Microsoft and Google. Ballmer said Yahoo was no longer a player, emphasizing that Microsoft has "nothing under discussion right now" with the No. 2 search vendor which Microsoft has been attempting to acquire for the past several months.

Ballmer reiterated that Microsoft considered buying Yahoo and/or Yahoo's search business as "a tactic, not a strategy." He told attendees Micorsoft wanted Yahoo primarily to build its advertising scale.

"People say 'you have to buy Yahoo,'" Ballmer said. "No, we don't."

Ballmer said he'd never say never, in terms of Microsoft talking to Yahoo at some point in the future. But now that it isn't ponying up $40 billion to buy Yahoo, Microsoft has more flexibility in how it will "up the ante" in its competition with Google in search and advertising, Ballmer said.

Ballmer spent considerable time justifying why Microsoft is willing to spend and lose billions to grow its search and advertising business. He told FAM attendees that Microsoft considers search "a killer app" for the new world in which more and more content and services go digital. Search also is becoming one of the best ways for distributing and promoting new services, Ballmer said.

Microsoft's Online Systems Business loss was about 5 percent of operating income, Ballmer said. But Microsoft believes that over time, that investment will give Microsoft a share of the trillion dollars of media, communications and advertising spending that will be up for grabs in the coming years -- perhaps as much as "40, 50, 60 percent" of Microsoft's current economic value, he claimed.

Microsoft plans to up the ante, sharpen the focus and reinvent search, Ballmer said. The company plans to build from its MSN, Windows Live and ad strength, going forward, as well as to find ways to make ads served through its platforms more relevant. He told FAM attendees that Microsoft is currently the tenth largest seller of advertising in the U.S. today.

There's a Catch-22 when it comes to search and advertising, Ballmer acknowledged. The more advertising a vendor gets, the more relevant the ads served to consumers can be. But a vendor also needs more queries to be made to serve the ads in the first place. Ballmer insisted that Microsoft can get its ad relevance up even without Yahoo with programs like Windows Live Cashback, more and deeper vertical search work and new deals, like the one it announced today to add Live-Search-powered Web search and search ads on Facebook this fall.

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