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2/1/2008
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Microsoft's Ballmer Discusses Yahoo, Google, Integration Challenges

CEO Steve Ballmer said Microsoft and Yahoo would work together to create a single online advertising platform.

Microsoft's $44.6 billion acquisition bid for Yahoo, one of the largest ever in the technology industry, would position Microsoft as a strong competitor to Google in the advertising and consumer online services market. But it also poses significant integration challenges for Microsoft and Yahoo.

"Any large integration process has risks associated with it," Microsoft CEO Steve Ballmer said Friday morning on a conference call with investors to discuss the bid. "I know we've all thought about it. We could have hired more engineers, but the market continues to grow and the leader continues to consolidate position. There's nothing like the chance to put together two large engineering organizations. A good integration actually should be quite an accelerant to progress."

Ballmer, Microsoft chief software architect Ray Ozzie, and other top executives said Microsoft and Yahoo would work together to create a single ad platform. It's unclear how the companies' portals and other services would be integrated, but Ozzie said a combined Microsoft-Yahoo would be able to create a "social platform" that could become a new entry point to the Web. "The combination of these two teams would enable us to jointly deliver a broad range of new experiences to customers that neither of us would have achieved on our own," he said.

The bid for Yahoo, at a 62% premium over the company's stock price at the end of the day Thursday, is one of the most open signs yet that Microsoft is desperate for ways to compete against Google in the world of online advertising, a market Microsoft estimates will double from $40 billion in 2007 to $80 billion by 2011. "Today this market is increasingly dominated by one player," Microsoft said in a press release. "Together, Microsoft and Yahoo can offer a competitive choice while better fulfilling the needs of customers and partners."

Kevin Johnson, president of Microsoft's platforms and services division, said on the conference call that Microsoft has already received unsolicited positive feedback on the bid from online advertisers and publishers.

Microsoft bought advertising firm aQuantive last year for $6 billion in its then-largest purchase. However, Microsoft remains a distant third place in the online advertising and search markets, with Google carrying more than half of all online advertising and search. Yahoo, which can't fall back on a desktop and enterprise software business like Microsoft can, has faced similar struggles, ousting Terry Semel from the CEO position last June. After reporting job cuts and a drop in profits earlier this week, Yahoo announced late Thursday evening that Semel would be stepping down as chairman of the company as well.

Despite the possibility that their new scale will bring customers calling and create new product opportunities, Microsoft faces a significant challenge in integrating two different cultures and a significant number of overlapping products. Microsoft and Yahoo offer a number of competing services today, including e-mail, advertising, search, and Web portals.

Microsoft said it has created an integration plan that includes "significant retention packages" for Yahoo employees. "The combined assets and strong services focus of these two companies will enable us to achieve scale economics while reaching R&D critical mass to deliver innovation breakthroughs," Johnson said in a statement.

Though Ballmer, in a letter to Yahoo's board, pointed toward scale economics that would "strengthen the value proposition to both advertisers and publishers" and shared research and development efforts producing "breakthroughs" in search, advertising, and new user experiences, Microsoft and Yahoo would likely go through a significant period of work to combine their search index and advertising platforms into a seamless whole, as Microsoft executives alluded to on their call with analysts. Microsoft would have to take care to keep Yahoo users on the hook if it hopes to integrate Yahoo services with Microsoft's own.

There's a potential that necessary work, and the amount of money spent on Yahoo, could have the effect of overwhelming Microsoft executives, a charge Ballmer flatly denied on the call. Asked if a Yahoo purchase would have any effect on moves Microsoft hopes to make in the enterprise market, Ballmer answered simply, "No."

Last year, Microsoft complained to federal antitrust regulators when Google made a bid to acquire online advertising company DoubleClick. In both a statement and Ballmer's letter to investors, Microsoft expressed confidence Friday that its purchase of Yahoo would clear all regulatory hurdles. If Microsoft's bid is successful, it may actually help push Google's acquisition of DoubleClick through its own regulatory processes, since the combined Microsoft-Yahoo would be a much more formidable challenge to Google than the companies are separately.

Even though Microsoft has invested heavily in the online world, the Web is not in its blood as it is in Yahoo's. Microsoft's legacy is desktop and server; Yahoo's is entirely online. "The Web continues to surprise Microsoft," Nucleus Research CEO Ian Campbell said in an interview. "Hopefully, Yahoo will shake up the old Microsoft way of doing things."

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