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Ballmer: People don't 'get' Microsoft's Yahoo! marriage

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FAM Steve Ballmer has had to sell Microsoft's search and advertising marriage with Yahoo! to financial hawks baffled by the deal.

Microsoft's chief executive told investors and analysts Wednesday "nobody gets" the deal because it's "a little bit complicated".

The chief source of that confusion? No acquisition was made and the deal is not about revenue. In fact, the costs, risk, and loss are all on Microsoft's side - at least initially.

Microsoft will pay Yahoo! 88 per cent of search revenue generated on Yahoo! sites for the first five years of their deal, with revenue guaranteed by Microsoft for the first 18 months of launch in each country.

Wall Street delivered its verdict Wednesday, when the marriage was announced, as Microsoft's shares remained almost unchanged during trading while Yahoo!'s stock closed the day down 10 per cent.

"I'd love to tell you we kept most of the economic value," Ballmer told Microsoft's annual Financial Analysts' Meeting at its Redmond, Washington, campus. "Well over 50 per cent of the economic value goes to Yahoo! We are in along term 10-year partnership with Yahoo!."

Ballmer called the marriage an opportunity to improve Microsoft's Bing search and AdCenter platform in the field, paving the way for future revenue.

Yahoo!'s combined online sites are the second most visited online destination, behind Google, according to Comscore. Having Yahoo! use Bing and Microsoft's ads platform gives Microsoft "scale", Ballmer said.

Scale means market share growth for Bing and AdCenter at a relatively low cost by simply rolling into Yahoo!'s existing technology and market footprint rather than Microsoft build its own. Ballmer said Microsoft could achieve scale for the same or lower percentage of its revenue.

"Scale is a tool for product improvement - the more queries you see the more you can tune your product, the more scale you have the more ads are on your system and the more relevant they make your ads. It's not about money, it's more about relevance," Ballmer said.

According to Ballmer, the deal frees Yahoo! to focus on its online media properties instead of keep spending on search and ads technology in an arms race against Google it can't seem to win.

"Economics is where people get even more confused," Ballmer said.

"What happened? Nothing got bought, nothing got sold... But the partnership in and of itself creates economic value, not just on the future promise of improved product and improved share and improved revenue, it creates immediate opportunities for synergy."

Despite being online since the mid 1990s with MSN, Microsoft’s missed many of the opportunities in search and advertising that Google and even Yahoo! capitalized on.

Reinforcing the need to partner with Yahoo!, Ballmer noted companies that don’t come to the right market early won’t grow.

“If this company is to grow on a sustained basis we need to invest in a few things that won’t pay off right away as well as somethings that will pay off right away,” Ballmer said.

“The greatest source of wealth creation is being in the right market early enough. If you aren’t in early enough, you aren’t going to grow with the market.” ®

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