Ballmer: Microsoft's poor search and ad performance drove Yahoo offer

Microsoft CEO Steve Ballmer admitted that despite considerable investments, Microsoft hasn't made as much progress in search engine advertising and usage as it had hoped.

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Microsoft CEO Steve Ballmer admitted that despite considerable investments, Microsoft hasn't made as much progress in search engine advertising and usage as it had hoped.

Speaking after the announcement of the proposed £22bn deal with Yahoo, he said "We've been losing money [in online services], our plan here is not to lose money in the future.”

The company had been trying to paint a rosy picture of its online advertising market growth since it acquired digital media services firm aQuantive last year.

However, Balmer was blunt about the company's online services business which has long suffered from lacklustre performance, something he said should change once Yahoo is on board.

A combined Microsoft-Yahoo would improve their respective positions in the search market, but still wouldn't top Google, which has a dominant lead both in search engine usage and advertising, Sterling said.

As Microsoft seeks to grow its online advertising business, it needs to achieve "critical mass" in three key segments -- advertisers, publishers and consumers, Ballmer said. While Microsoft's aQuantive acquisition boosted the advertiser and publisher rosters, a Yahoo acquisition would significantly bolster the consumer piece of the strategy.

"We see this announcement as the next major milestone in Microsoft's company-wide transformation to embrace online services overall and to invest very successfully in search and advertising," Ballmer said.

He also pointed out that gaining Yahoo's experience and staff in Internet research and development will help Microsoft advance its push to Web-enable its core products like Windows and Office.

"The Windows user wants to be live, the Windows experience needs to increasingly embrace the Internet. There will be a Windows Live, there will be an Office Live, as we continue to bring out innovations in which Office transforms and is transformed by the Internet," Ballmer said, in a clear reference to the rising popularity of Web-hosted productivity software like Google Apps, Zoho and Yahoo's Zimbra.

Microsoft has often been criticised for how slow it's moved to shed its legacy of desktop software to keep up with the innovations of Web 2.0. The addition of Yahoo could indeed help the company do that, if Microsoft takes full advantage of the deal and uses it to alter its current course, said Ron Schmelzer, analyst and managing partner at Zapthink.

"This has to be transformative across all areas of Microsoft," he said.

Ray Ozzie, Microsoft's chief software architect, said Yahoo will help the company fortify its search engine technology and advertising business, an area that he said is ripe for innovation, implying that Microsoft hasn't conceded defeat to Google in search.

"Search now plays a pivotal role in how we find information, how we research, how we shop. For the most part, search is still 10 blue links, but innovations will transform the search user experience and the way ads are delivered," he said.

With Yahoo, Microsoft will also become a stronger player in the so-called social Web and will be able to innovate and develop better social applications and platforms not only in the consumer space but also in the workplace, Ozzie said, referring to the popularity of social networks and blogs.

"This social platform will progressively become a new entry point to all that the Web can offer. Before long, these same technologies will even transform the productivity side of our lives as the social platform enters the workplace," he said.

Chris Liddell, Microsoft's chief financial officer, said the offer translates into a premium of more than 100% if one takes into consideration that a large part of Yahoo's value lies in non-operating business, meaning essentially, in external investments. "When you look at our offer relative to operating assets it's greater than a hundred% premium," Liddell said.

Johnson highlighted the importance for Microsoft of achieving scale in online advertising.

"In the online advertising industry, scale matters. Scale economics come into play in driving yield of ad serving whether it's search or non-search related ads. By aggregating a critical mass of inventory on a single ad platform it enables that ad platform to drive higher yields for the publishers," Johnson said.