News

Ballmer and Liddell Defend Microsoft's Online Spending Plans

• By Kurt Mackie
• July 24, 2008

During the event, Microsoft's CEO Steve Ballmer filled in for Kevin Johnson, whose departure as head of the Platforms & Services Division was announced on Wednesday, along with a Microsoft division restructuring effort.

Ballmer provided a rationale for all of the spending going on in Microsoft's Online Services Business segment. He said the spending can address a market potentially worth a "trillion dollars."

"That's such a big opportunity that at least at our scale, our size, our market cap, we have to seize and go after those opportunities," Ballmer explained.

He added that Microsoft can build from its present online products (search, Windows Live and MSN) and that Microsoft has already become the 10th largest seller of advertising in the United States. Moreover, search represents a kind of "killer app" and entry point for Microsoft's online strategy. Ballmer dismissed the No. 2 search firm Yahoo, which currently leads Microsoft in search use, saying, "this is a two-horse race: Microsoft against Google."

Ballmer suggested just how much Microsoft may be willing to spend to contest Google in the search-ad space. He said that "Google spends about $2.5 billion and growing on R&D." In response, Microsoft might consider a range of "at least $1.2 billion or $1.5 billion a year to stay competitive."

Ballmer also gave a bow to Apple's recent inroads into the Windows-based PC market share. He said that Microsoft planned to offer products that offer "every choice that you can get on a Mac or other machine."

Chris Liddell, Microsoft's chief financial officer, assured the crowd that Microsoft's core business revenues have been flat over a five-year period, showing a 61 percent margin in fiscal-year 2008, which Liddell called "a tremendous performance." In contrast, the loss for Microsoft's Online Services Business segment, which drives Microsoft's search and online strategies, was 38 percent in fiscal-year 2008.

Liddell said that figure will "not always be negative" and that the Online Business Services spending is part of the company's efforts to generate future revenues.

The potential Yahoo acquisition, which was publicly proposed in January but technically called off in April, would have accelerated Microsoft's strategy in the online search-advertising space. However, Liddell claimed that the value of that deal had declined over time after Yahoo spurned Microsoft's unsolicited bid.

"We took the view, and still take the view, that Yahoo is a declining asset," Liddell said. He added that it is ironic now that Yahoo is willing to sell to Microsoft at the price Microsoft originally offered. He didn't rule out the possibility that Microsoft might still strike a deal to buy Yahoo's search-ad business.