Microsoft Lays Out Post-Yahoo! Plans - TheStreet

Microsoft Lays Out Post-Yahoo! Plans

Microsoft's CEO says the company plans to be a major player in the $1 trillion online services market.
Publish date:

SEATTLE -- With a Yahoo! (YHOO) deal no longer in play, Microsoft (MSFT) - Get Report is taking an alternate path to become a big player in the search and online world.

That was the message chief executive Steve Ballmer delivered to financial analysts at a conference at its Redmond, Wash., headquarters Thursday.

"We're going to have to ante up in a significant way to be in this game," he said. He estimated the market potential for online services at greater than $1 trillion and compared it to Microsoft's decision to go after the enterprise server market in the 1990s, which has since become one of the company's cash cows.

Investors relieved by Microsoft's recent decision to walk away from a Yahoo! deal should still expect the company to plow some of that war chest back into the online business. Microsoft initially offered $44 billion for Yahoo!, half in cash.

Ballmer said the company expects to raise operating expenses by about $4 billion in fiscal 2009, which began in July.

The chief executive seemed relieved that Yahoo! had not agreed to deal terms. The failure of that offer hastened the departure Wednesday of Kevin Johnson, who headed the initiative and was to have addressed the company's online future at Thursday's meeting. Johnson has been named CEO of

Juniper Networks

(JNPR) - Get Report


Ballmer outlined a plan to redirect the capital earmarked for Yahoo! into other projects intended to provide the same results. He noted the Cashback program that rewards consumers who buy products from participating advertisers they connect through a search on MSN was not announced until the Yahoo! offer had been put to rest.

"The fundamental premise of the online venture is to capture the market as the world moves all content that is read, watched and communicated onto IP networks, Ballmer said. "This is a huge transformation in the world's economy. It comes as much a software opportunity as anything else. As soon as you say video moves to the Internet, now you can

add intelligent, value-added software," Ballmer said

Microsoft is intent on capitalizing as TV and video viewing, Web conferencing, advertising, customer service, content, community interactions and commerce move to the Internet. "The size and magnitude of that is unbelievable. In aggregate, it is one of the largest parts of the world's economy," Ballmer said. "This is a transformation in its infancy."

While Yahoo! would have delivered a big jump in Microsoft's search numbers, it was only one of several tactics it has mapped out to counter


(GOOG) - Get Report

strength. "Search is ... not commerce, but it's a killer app for this new world."

Ballmer sought to rationalize the risk/reward basis of Microsoft's online investment, which many investors question. Shareholders have been unhappy with Microsoft's decision to spend the upside from its recent server product launches.

"Our online systems business loss was about 5% of operating income" in 2008, Ballmer said. "The amount of economic opportunity to pursue this world as it goes digital represents 40%, 50%, 60% of our economic value today. It's a relatively small percentage investment in order to have a real opportunity at significant overall acceleration of our market value. It's a very good risk/return for us."

Shares of Microsoft were down 79 cents, or 3%, to $29.64 in recent trading.