Microsoft Needs Yahoo! to Compete Against Google, Ballmer says

Updated from Thursday, Mar. 6, 8:58 p.m. EST

SAN FRANCISCO -- The chief of Microsoft(MSFT Quote) put himself in the crosshairs Thursday when he invited an antagonist to fire questions at him.

The scene was Mix08, a Microsoft event for software developers, where CEO Steve Ballmer held an informal conversation with Silicon Valley venture capitalist and Apple ally Guy Kawasaki.

The discussion ranged from the pursuit of Yahoo!(YHOO Quote) to competition with Google(GOOG Quote) and Apple(AAPL Quote).

In addition to needling Ballmer about his reputed temper and referring to the Redmond, Wash. company as the "evil empire," Kawasaki, one of the first employees of Apple, kicked off his interview by asking why Ballmer had refused to hire him two decades ago, before moving to meatier topics.

"I'm supposed to be your shill and ask you all these softball questions. So, why do you want to buy Yahoo!?" Kawasaki said.

Ballmer took the comments in stride, offering to replace Kawasaki's iMac with a "real machine."

Ballmer said search is online advertising's killer application and will be the next "super-big thing." "We've got a long way to go. Yahoo! seems to be a way to accelerate that because of the critical mass that's required to compete."

"Scale, which is a form of synergy, is really an advantage in the search game," Ballmer said. Having more search share brings more advertisers, which leads not only to more bidders on keywords but also a "larger corpus of relevant ads you have to insert on pages," he added.

Google has more ads to insert on keywords than either Microsoft or Yahoo! has, Ballmer said. "So getting scale is perhaps the most obvious of synergies. In addition, they have a bunch of talented engineers duplicating research that Microsoft is also engaged in."

"The Y-word is all about the G-word," surmised Kawasaki as he wondered aloud whether Microsoft has to fight Google to the bitter end.

Ballmer said Microsoft has a spate of competitors in its core desktop and server software businesses, where Google isn't a player. But he acknowledged, "We've got an aspiration in online. And in online, yeah, it's Google, Google, Google."

Ballmer said Microsoft will work on building search and advertising share as long as he remains at the company.

"We have to have a strong position in online search and advertising if we're going to be a serious player," Ballmer said. "It's a zero-sum game. I want a larger percentage of searches made with our stuff."

An Apple loyalist, Kawasaki asked if Microsoft views the company as an insignificant competitor.

"I'm not going to take anything away from Apple," Ballmer replied. But he criticized Apple in an area where Microsoft would like to be a partner.

He said Microsoft's efforts to get Apple's iPhone to run its Silverlight software for Internet video have been stymied by Apple's terms on third-party applications for the device.

According to Ballmer, Apple will permit such applications to run only through its own platform and at a steep price. "It seems they're trying to charge a whole lot more for [running third-party applications] than just about anyone else on the face of planet," Ballmer said. "I think they want 30% of every bit of revenue you collect."

"It may mean that Apple's not welcoming open royalty-free runtimes on its platform. We'll have to wait and see," he added.

Kawasaki, historically an antagonist of Microsoft, gave Ballmer kudos for a personality change he's perceived in the software giant. "I've been working with Microsoft a lot the last few years, unbeknownst to you," he said. "It's a different Microsoft today. There's not the arrogance" that employees had been famous for in the past.