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Thursday, August 7, 2008

Microsoft Makes Case for Online Push

Ballmer Plans to Bulk Up Technology, Marketing And Pursue Acquisitions

Microsoft Corp. Chief Executive Steve Ballmer tried to put a good face on the software maker's failed attempt to buy Yahoo Inc. and pressed the case for Microsoft's continued investment in online services -- particularly Internet search.

Microsoft also said it reached an agreement with Facebook Inc. to link its Internet-search service with the social-networking Web site. The agreement is an extension of an existing relationship between the two companies.

Mr. Ballmer's comments came at Microsoft's annual meeting with analysts at its headquarters in Redmond, Wash. He and other executives devoted much of the meeting to addressing investor concerns about Microsoft's Internet business. Central to his strategy, Mr. Ballmer said, will be boosting spending on online-related technologies and marketing, and on buying other companies.

"We're going to have to ante up in a significant way to even be in this game," Mr. Ballmer said.

Microsoft spent most of this year trying to strike a deal with Yahoo -- first trying to buy the whole company and then trying to buy its Internet-search business -- but that quest ended when Yahoo rejected Microsoft's offers. On Wednesday, Microsoft said Kevin Johnson, the executive in charge of the division that houses its online business, will leave Microsoft and that it will reorganize the division.

Mr. Ballmer Thursday said that Microsoft didn't want to buy Yahoo "at the wrong price" and noted that the inability to reach an agreement in the spring made it impossible to start a regulatory review of any deal before a new U.S. president took office. He also said that buying Yahoo would have created "huge integration overhead" to merge the two companies.

Without Yahoo, he said, Microsoft will have more flexibility to try to attack Google Inc. with new technologies and acquisitions in Internet search. "I'm not going to say it's not a big bet. It is. I'm not going to say it's not risky. It is," he said.

Investing in search is important, he said, because it is a foundation for creating other consumer Internet services.

"Search is one of the starting points on the Internet," Mr. Ballmer said. "It's the best place to distribute new Internet services to the consumer."

Under the relationship with Facebook, U.S. users of the site will be able to search the Internet using Microsoft's search service, called Live Search.

The partnership gives Microsoft the exclusive right to offer Web search and search ads to U.S. Facebook users. The software company already is the exclusive third-party provider of traditional banner advertising on Facebook in the U.S. and internationally, and last year bought a 1.6% stake in the start-up for $240 million.

The search service will start on Facebook this fall, Microsoft Senior Vice President Satya Nadella said. Financial terms weren't disclosed. It comes as the two companies had been discussing the impact of a Facebook redesign that shifted where Facebook displayed Microsoft-sold banner ads on the site.

It is unclear how much the agreement could help Microsoft boost its share of the search market, in which it is a distant third to leader Google and No. 2 Yahoo. Google has an exclusive deal to power search and search advertising on MySpace.com. Analysts have estimated that Google is losing money on the $900 million three-year deal, which expires in 2010 -- although both sides say they are pleased with the partnership.

In a separate announcement, Microsoft said it will buy DATAllegro Inc., a Silicon Valley start-up that combines software for managing what the industry calls data warehouses with computing hardware. Financial terms weren't disclosed.

By: Robert Guth and Jessica Vascellaro
Wall Street Journal; July 25, 2008